Redbox Stock Prices Surges, Possibly Threatening the Chicken Soup for the Soul Acquisition

Driven by social media investors and internet chatter, shares of Redbox Entertainment exploded June 13 in midday trading, surging more than 22% to $18.20 per share as day traders swapped more than 40 million shares — double the peak daily tally.

Similar to the fuss made a few years ago when social media investors sent shares of GameStop and AMC Theatres on wild rollercoaster valuations, scuttlebutt about Redbox on the Reddit WallStreetBets investing forum reportedly surged 400% in the past 24 hours.

Morningstar reported that short interest in Redbox shares reached almost 38% of the float, or the total number of shares that are available for public investors to buy and sell.

The buzz could impact Redbox’s acquisition by Chicken Soup for the Soul Entertainment, which had agreed to buy the legacy kiosk disc vendor based on a valuation of $375 million — not the current $700+ million value.

Regardless, Michael Pachter, media analyst with Wedbush Securities in Los Angeles, contends the entire scenario defies logic. He believes meme investors think that Redbox is worth nearly $1 billion, which includes debt.

“The stock might be up on that, but if my reading is correct, the meme traders are making a huge mistake,” Pachter said in a recent email.

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Analyst on Redbox: ‘There is Value There’

NEWS ANALYSIS — As Redbox Entertainment’s share price continues to fall, scuttlebutt would suggest the future is cloudy for the venerable home entertainment distributor. But a prominent Wall Street analyst thinks otherwise.

Redbox early last month revealed that its yet undisclosed financial results had been undermined more than expected by the lack of new movie releases in 2021. The company, like much of the home entertainment industry, saw an uptick during the early days of the pandemic as homebound consumers sought alternative entertainment options.

The Redbox kiosk has always been the most cost-effective way to rent a new-release DVD/Blu-ray Disc movie. Those same titles are also available earlier to rent or buy digitally on the Redbox platform — at higher prices.

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Michael Pachter

To help fill the void, Redbox has upped marketing spend while acquiring mostly digital (ad-supported streaming) distribution rights to indie movies — all strategies that requires capital at the same Redbox’s market cap declines.

Then Redbox disclosed this: “On Jan. 28, 2022, Redbox borrowed the remaining availability under its revolving credit facility. Redbox’s primary sources of liquidity are cash on hand, cash flow generated from operations, and amounts available under its revolving credit facility. Management is actively taking steps to decrease monthly costs, delay capital expenditures, and increase revenues. Redbox is also evaluating a variety of strategic alternatives.”

A sobering statement, indeed, but not the end, according to Wedbush Securities analyst Michael Pachter, who contends that many of Redbox’s 39 million loyalty customers are indeed late adopters to over-the-top video consumption.

“Yes, many are Netflix customers, but most still like movies and may not have enough money to subscribe to multiple services,” Pachter wrote in an email.

He suggests that Redbox has a strategy that the late adopter will like “free” ad-supported TV (the same thinking Roku applies to The Roku Channel) and that they will be able to convert a meaningful percentage of their loyalty members via promotion.

“There is value there, they have just not done a great job of execution,” Pachter said.

Netflix’s Stock Skyrockets to Record High Following Wall Street Kudos

At a time when media and entertainment companies struggle to sustain operations due to the coronavirus pandemic, SVOD juggernaut Netflix appears to be riding high, getting repeated praise on Wall Street. The result is an escalating stock price and valuation that topped The Walt Disney Company at the close of trading on April 15.

Netflix shares closed at a record high of $426.75 per share, topping the previous high of $418.97 per share on July 9, 2018.

Why all the investor love? Netflix’s business model appears to be marginally affected thus far by the coronavirus pandemic. While its content production remains shuttered along with the rest of Hollywood, Netflix was one of the first media companies to create a relief fund ($100 million) to assist production personnel and related staff on its original content sidelined without pay during the shutdown.

Analysts contend Netflix subscriber growth has been robust as millions of people (especially in Europe) have been forced to quarantine in their homes. Subscriber growth estimates range from more than 7.5 million to 9.5 million worldwide.

Netflix has also scored big with viewers for its new reality-based true crime documentary miniseries “Tiger King,” about the life of bizarre zookeeper Joe Exotic.

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“We believe the unfortunate COVID-19 situation is cementing Netflix’s global dominance partly driven by the incremental content spend that is enabled by their massive and growing subscriber base,” Jeffrey Wlodarczak, analyst with  Pivotal Research Group, wrote in an April 15 note.

Even longtime Netflix bear Michael Pachter with Wedbush Securities in Los Angeles is giving the streamer a short leash, raising his stock price to $194 per share from $173. But Pachter warns Netflix’s place in the sun during a storm could be short.

He argues Netflix’s long-running excessive cash burn will eventually haunt the service and production shutdowns due to the pandemic could result in higher subscriber churn when the original content portfolio runs dry.

Netflix reports first-quarter (ended March 31) fiscal results on April 21.

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Netflix Stock Loses All Gains Made in 2019

The end of the third quarter on Sept. 30 can’t come soon enough for Netflix.

The subscription streaming video behemoth saw all positive stock gains on Wall Street disappear at the close of trading Sept. 23 — with shares down 46% from a peak valuation in July.

With nonstop press releases touting programming defections (i.e. “The Office,” “Friends,”), executive hires, possible subscriber interest and low-ball pricing from pending SVOD newcomers Apple TV+, Disney+, HBO Max, Verizon’s BET+ and NBC Universal’s Peacock, Netflix’s invincibility has taken a beating.

Typically, any concern about Netflix would be quickly erased with the next earnings report. But following the service’s Q2 disclosure of rare subscriber losses in the United States and below-expectation sub growth internationally, all bets are off.

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Co-founder/CEO Reed Hastings himself seemed to voice caution just last week telling an industry confab in the United Kingdom that “a whole new [SVOD] world [would be] starting in November.”

Fickle Wall Street is (albeit slowly) changing its tune on Netflix.

Of the 39 analysts covering Netflix, two have “sell” ratings for the stock, while nine  have a “hold” on the shares.

Kannan Venkateshwar with Barclays said Netflix’s stock has become “very expensive” based on the growing costs required for future sub growth.

Mark Kelly, analyst with Nomura Instinct, told CNBC that increased third-party SVOD competition could make content more expensive and “diminish the price power” Netflix has exerted in recent years.

CNBC parent Comcast just expanded exposure for streaming service Xfinity Plex, and is launching the Peacock SVOD platform early next year.

Michael Pachter, a longtime Netflix bear at Wedbush Securities in Los Angeles, contends the challenges Netflix faces creating original content are no different than Disney+ & Co. face.

At the same time, Pachter says Netflix’s strategy of flooding the channels with content can’t mask quality issues.

“The company may brag about its Emmy nominations or its Oscar wins, but it has approximately 10 times as many shows eligible for Emmy consideration as HBO, which won handsomely in 2019 for multiple shows,” he wrote in a note.

Pachter suggests Netflix is on the verge of losing around 65% of its domestic viewing hours when Comcast, Warner/HBO and Disney/Fox launch services their services and allow their current deals to expire.

“We estimate that Netflix pays around $5 billion a year for this content, so it will have a ton of cash available to bid on other content, and its bid for “Seinfeld” shows that it is willing to raise the stakes for licensing content,” he wrote.

Indeed, Netflix inked an exclusive deal with “Game of Thrones” showrunners David Benioff and D.B. Weiss for a reported $200 million.

While Wall Street appears confident Netflix can continue growing subs worldwide, domestic growth will be challenged with the arrival of Disney+ and Apple TV+ in November.

“We think … that a slowing of domestic growth will continue to pressure the stock over the next several quarters,” Pachter wrote.