Is Redbox Entertainment Stock a Buy Now?

Barbara Merkley

Redbox Entertainment (RDBX 0.00%) went public by merging with a special purpose acquisition company (SPAC) last October. The video rental kiosk and streaming video service provider’s shares closed at $11.90 on the first trading day, briefly touched an all-time high of $27.72 the following month, then plummeted to just $1.61 per share this February.

Redbox’s stock plunged because its rental kiosks were becoming irrelevant, its streaming video business was still struggling, and its balance sheet was a mess. Those red flags made it an easy target for short-sellers as rising interest rates rattled the markets. However, Redbox’s stock subsequently rebounded to about $7 as the short sellers overstayed their welcome. Let’s see if its recent gains are sustainable — and if its stock is worth buying.

Image source: Getty Images.

Redbox’s core business segments

Redbox was founded 20 years ago. Its DVD and video game rental kiosks initially disrupted physical rental stores like Blockbuster in the 2000s, but its growth sputtered out in the 2010s after its chief competitor Netflix (NFLX 7.65%) pivoted from physical disc rentals to streaming video services and video game publishers transitioned toward digital downloads.

Redbox’s “legacy” business, which accounted for 89% of its top line in the first nine months of 2021, still generates most of its revenue from those kiosks. But that footprint is shrinking: it operated 38,632 kiosks across the United States at the end of the third quarter, compared to 40,026 kiosks at the end of 2020 and 41,420 kiosks at the end of 2019. Its kiosks stopped renting out video games in 2019, and sold them at discounts through 2020.

As the legacy segment’s kiosk business shrinks, it’s expanding Redbox Entertainment, a newer division that produces, acquires, and distributes its own films. It expects the growth of Redbox Entertainment to gradually offset the legacy segment’s loss of kiosk revenue.

Meanwhile, Redbox is expanding the “digital” business that generated the remaining 11% of its revenue in the first nine months of 2021. This segment houses its on-demand streaming service, Redbox On Demand, and a free, ad-supported streaming service called Redbox Free Live TV.

A shrinking business with soaring expenses

Redbox’s digital business grew in 2019 and 2020, but couldn’t offset the steep declines at its legacy business. Both businesses posted declining revenue in the first nine months of 2021.

Revenue Growth (YOY)

2019

2020

9M 2021

Legacy

(22%)

(40%)

(56%)

Digital

96%

101%

(24%)

Total

(21%)

(36%)

(53%)

Data source: Redbox S-1 filing. YOY = Year-over-year.

The deceleration of its digital business can be attributed to intense competition in the streaming video space from premium platforms like Netflix and Walt Disney‘s Disney+ as well as ad-supported platforms like the Roku Channel and Comcast‘s Peacock. The industry also faced tough year-over-year comparisons to the elevated usage of streaming video services throughout the pandemic.

Redbox’s expansion of its streaming platforms caused its operating expenses to surge. Its operating income plunged 76% to $29.8 million in 2019, and it incurred an operating loss of $62.2 million in 2020 and an even wider operating loss of $99.2 million in the first nine months of 2021.

As a result, Redbox’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 33% to $195.6 million in 2020, tumbled 42% to $113.8 million, and turned negative with a loss of $8.9 million in the first nine months of 2021.

Moreover, Redbox only had $9.8 million in cash and equivalents at the end of that period, but it was still shouldering $477.6 million in total liabilities. It secured an additional $50 million in financing in late April to improve its liquidity, but its CFO Kavita Suthar — who helped engineer the SPAC deal — also announced her resignation at nearly the same time.

Can Redbox actually survive?

Suthar’s abrupt resignation raises some eyebrows, since Redbox made some bold promises during its SPAC presentation last May.

The company claimed it could grow its legacy business at a compound annual growth rate (CAGR) of 13% between 2020 and 2023 as Redbox Entertainment releases more theatrical movies in a post-pandemic world. It also expected its on-demand business to grow at CAGR of 113%.

Redbox believes its total revenue will rise from $400 million in 2021 to $1.11 billion in 2023, and its adjusted EBITDA will jump from $40 million to $237 million. If those bullish estimates are to be believed, then its stock looks like a bargain at less than one times this year’s sales.

However, I think Redbox’s estimates are far too optimistic. Streaming leaders like Netflix are already struggling, and it will be tough for Redbox to stand out in the crowded film production and distribution market.

This stock is too risky to own

Redbox’s stock bounced back from its all-time low because the short sellers got carried away. It’s unclear exactly how many shares are being shorted right now — the official numbers claim that 11% of the float was shorted as of April 13, but third-party data from Fintel suggests that percentage might be higher than 40% right now.

That ratio makes it a potential short squeeze candidate, but it’s definitely not a stock for long-term investors. Redbox’s business model isn’t fundamentally sound, and it could easily collapse within a few years.

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