- Redbox Entertainment (RDBX) has an outdated and underperforming business model.
- The company’s shares have been treated as a meme stock since going public last year.
- Being acquired by Chicken Soup for the Soul Entertainment is the best outcome for Redbox and its beleaguered shareholders.
Hoping that shares of Redbox Entertainment (NASDAQ:RDBX) recover is like wishing you could still rent movies on VHS cassettes at the local Blockbuster Video store.
For readers who are unfamiliar, Redbox is a video rental company based in Oakbrook Terrace, Illinois, that specializes in movie rentals on formats such as DVD and Blu-ray, as well as video game discs and cartridges. These movies and video games are available to consumers through automated kiosks that are positioned in retail outlets such as grocery and convenience stores.
To say that Redbox’s business model is outdated would be an understatement. In an age of streaming, this approach to renting movies and video games feels like it came from the stone age. This explains why RDBX stock has fallen 76% in the past six months, including a 56% decline this year, to now trade at just $3.28 a share.
Down and Out
Redbox went public via a reverse merger with a special purpose acquisition company (SPAC) last fall just before the stock market peaked and began to decline. The shares initially vaulted as high as $27.22 as retail traders treated the company as a meme stock.
Since then, RDBX stock has come crashing back to earth, having fallen 88% to now trade below the $5 penny stock threshold.
The stock again seemed to be targeted in a short squeeze executed by retail traders in April of this year. It jumped 347%, from $1.91 a share on April 11 to $8.53 per share on May 2 before again deflating and falling to its current price.
It appears that Redbox is the type of outdated, retro business and heavily shorted stock that retail investors look for in meme stocks. Indeed, Redbox seems to be a combination of two other popular meme stocks — brick-and-mortar video game retailer GameStop (NYSE:GME) and struggling movie theater chain AMC Entertainment (NYSE:AMC) — both of which have been pumped and dumped over the last year.
The volatility that comes with being a meme stock should be enough to scare most investors away from RDBX stock. However, Redbox remains a popular topic of discussion on social media sites and the WallStreetBets sub-Reddit.
Chicken Soup for the Soul
While Redbox stock appeared to be doomed, it is now getting rescued by Chicken Soup for the Soul Entertainment (NASDAQ:CSSE), which has just announced that it will acquire Redbox in an all-stock deal that values the video rental company at $375 million. The deal will see Chicken Soup for the Soul assume Redbox’s debt.
With the acquisition, Chicken Soup for the Soul Entertainment gets Redbox’s collection of 38,000 video-dispensing locations, as well as some video production assets and advertising contracts. Based in Cos Cob, Connecticut, Chicken Soup for the Soul is a media company best known for its popular book series called, as you may have guessed, “Chicken Soup for the Soul.” The company has also branched out into food, pet food and television programming.
That Redbox plans to sell itself so shortly after going public should not come as a big surprise to investors who have followed the long, slow demise of the video rental company. Earlier this year, Redbox announced that it was laying off 10% of its workers amid slumping sales, and told analysts that it was looking at “strategic alternatives.”
The transaction, which is expected to close in this year’s second half, has been approved by the boards of directors of each company. RDBX stockholders will receive 0.087 of a Class A common stock of Chicken Soup for the Soul Entertainment for each Redbox share they own.
There’s No Point In Buying RDBX Stock
Previously, there was no point in buying Redbox stock. The company’s antiquated business model, poor performance and meme stock status made Redbox poison to investors.
But now that the company is being acquired by Chicken Soup for the Soul Entertainment, there’s definitely no point at all in acquiring shares. Best for investors to let Redbox be gobbled up by Chicken Soup for the Soul and disappear into history along with the VCR, Walkman, and Atari 2600 video game console. RDBX is not a buy.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.