DVDs may be dead, but DVD-kiosk company Redbox Automated Retail LLC is attempting to breathe life into its business with its digital ambitions.
The company completed its reverse merger with special purpose acquisition company Seaport Global and began trading on the Nasdaq exchange Oct. 25. Despite strong recommendations by sell-side analysts, markets have been notably sour on Redbox since it issued its first public financial update in late November.
Following the announcement that Seaport would use its SPAC status to acquire Redbox from Apollo Global Management Inc. and allow the company to invest public funds into its nascent streaming video strategy, Seaport's pre-merger stock traded in range of its $10 IPO price. However, shares began to move erratically as the company completed the merger. By Nov. 3, Redbox shares had jumped to $17.93. As of the morning of Dec. 7, they were trading below $10.
Redbox's market capital deteriorated sharply after Nov. 22 when it reported net revenue for the year through Sept. 30 at $216.4 million, down 53.5% from the same period in 2020. The company's operating loss stretched to $99.2 million during that period compared to $27.8 million in the 2020 prior-year period.
As of the close of Dec. 3, Redbox shares were down more than 28% from Nov. 22, compared to a 5% loss for the Nasdaq.
Analysts, though, generally remain positive on the stock, noting that as an entertainment business, the company continues to face extraordinary hurdles due to the pandemic.
Redbox's miss was largely tied to the fact that studios are still producing a low volume of new content that Redbox customers can rent, B. Riley Securities analyst Eric Wold said.
Because the September results missed expectations, Wold adjusted downward his near-term expectations for the company, but his long-term thesis for Redbox remains intact.
"We understand that studios have been holding physical release plans very close to their vests — which has made it extremely difficult for RDBX management to effectively plan around kiosk availability and marketing campaigns to drive traffic to the kiosks. We continue to expect this to begin to improve further in early 2022," Wold said in a Nov. 30 note, pointing to a 2022 film release slate that includes titles in the "Jurassic World," "Transformers," "Mission: Impossible," "Top Gun" and "Avatar" franchises, as well as several Marvel and DC Universe films.
Despite this year's miss, the company can still reach its guidance of earning $1 billion revenue in 2023, Wold said, reiterating a "buy" recommendation and a premium $35 12-month price target.
The crux of Redbox's digital growth strategy depends on converting some portion of its value-conscious, late-adopter kiosk customer base to streaming video users, which it could achieve given the broad, secular shift to digital streaming from traditional pay TV, Wedbush Securities analyst Alicia Reese said in a Nov. 29 note initiating coverage of Redbox.
"Ultimately, its goal is to become a one-stop shop for consumers by integrating multiple digital video services," Reese said. "The company's branding and large customer base provide a competitive advantage as it endeavors to grow its digital presence."
The company only needs to convert 10% to 15% of its 40 million DVD kiosk customers to streaming in order to hit $1 billion in revenue, Reese noted.
Reese gave Redbox an "outperform" rating but stopped short of giving the company a premium valuation, noting that the streaming strategy is still "in its infancy" and that the company "faltered" with its first financial report as a public company. Reese pinned Redbox with a $15 12-month price target.
All in all, the company is receiving overwhelmingly positive commentary by the few analysts who have initiated coverage. Of four sell-side analysts identified by S&P Global Market Intelligence, the company averaged a very strong "buy" recommendation.
The company's legacy products include its namesake kiosks, a kiosk servicing trade and a content production studio. The company's digital strategy, which has been expanding since 2017, is similar to that of Roku Inc. It includes on-demand transactional streaming, free ad-supported streaming channels bundled into a network and free ad-supported on-demand content. The company in 2022 also plans to provide on-platform access to third-party subscription-video services as a digital aggregator.