Redbox Entertainment Inc. (RDBX) provides consumers access to a wide range of digital and physical media content. The company operates a rapidly expanding digital streaming service that offers ad-supported (AVOD), paid movies from Hollywood studios, hundreds of content partners, and over 130 free ad-supported streaming television channels (FAST).

The stock surged 107.5% on July 26 from the July 22 level on speculation over its potential short squeeze. The speculations were triggered by weak prospects of Redbox’s DVD rental kiosks, which contribute 90% of the company’s revenues. Analysts’ skepticism about the sustainability of this business as streaming continues to gain dominance made this stock a short-selling target.

However, the company’s shares have plunged 36% since July 26 to close the last trading session at $4.05. Moreover, it has lost 45.3% year-to-date. In addition, the stock is currently trading 85.1% below its 52-week high of $27.22, which it hit on October 26, 2021.

While the stock could rebound significantly because of its short squeeze potential, is it wise to buy it now? Here’s what could shape RDBX’s performance in the near term:

Inadequate Financials

RDBX’s revenue decreased 17.6% year-over-year to $63.23 million for the first quarter ended March 31, 2022. Its operating loss grew 64.9% from the year-ago value to $48.19 million. The company’s net loss increased 50.3% from the prior-year quarter to $40.87 million. Its loss per share amounted to $0.11.

In addition, its cash and cash equivalents came in at $13.66 million, representing a decline of 26.1% for the three months ended March 31, 2022.

Negative Profit Margins

RDBX’s trailing-12-month gross profit margin of 11.6% is 77.2% lower than the industry average of 50.7%. Also, its trailing-12-month ROA, ROC, and net income margin are negative 24.1%, 34.4%, and 31.7%. Moreover, its trailing-12-month negative EBITDA margin of 17.7% compares to its industry average of 18.6%.

Consensus Rating and Price Target Indicate Potential Downside

Of the three Wall Street analysts that rated RDBX, one rated it a Sell. The 12-month median price target of $0.83 indicates a 79.5% potential downside. The price targets range from a low of $0.65 to a high of $1.00.

POWR Ratings Reflect Bleak Outlook

RDBX has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. RDBX has an F for Stability and a D for Sentiment. The Stability grade indicates RDBX’s higher volatility than its peers. In addition, the poor consensus price target is in sync with the Sentiment grade.

Of the eight F-rated Entertainment – Movies/Studios industry stocks, RDBX is ranked #4.

Beyond what I’ve stated above, you can view RDBX ratings for Growth, Value, Momentum, and Quality here.

Bottom Line

RDBX’s near-term prospects look bleak owing to its poor profit margins and lackluster financials. In addition, the stock is currently trading below its 50-day and 200-day moving averages of $7.05 and $6.51, respectively, indicating a downtrend. So, we believe it is prudent to avoid the stock now.

RDBX shares were trading at $4.08 per share on Thursday morning, up $0.03 (+0.74%). Year-to-date, RDBX has declined -44.94%, versus a -12.22% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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