Redbox sell-off opens window of opportunity, analysts say

Redbox Automated Retail LLC investors went on a selling spree earlier this month, and analysts say the drop has created a buying opportunity.

The sell-off came after the DVD kiosk operator said it had experienced "materially lower" financial results than expected in the fourth quarter of 2021. The company attributed the results to expanded competition, fewer theatrical releases than expected and impacts from the omicron variant of COVID-19. Redbox now expects fourth-quarter DVD kiosk rentals to be lower than the prior-year period. Management is not only considering ways to shore up its balance sheet but also evaluating strategic alternatives.

While Redbox did not provide specific results for the quarter, the Feb. 2 disclosure sent Redbox shares tumbling. Between Feb. 1 and Feb. 7, shares of Redbox dropped more than 55.8%. The company's stock opened Feb. 8 at $2.20, less than a quarter of the approximately $10 per share at which it entered the public market in October 2021 through a special purpose acquisition corporation.

However, sell-side analysts believe Redbox's difficulties are more tied to the pandemic than to company strategy.

"Although RDBX's financial results have been consistently below projections since the SPAC transaction was announced in May 2021, we believe this to be more of a function of the uncertain theatrical film release slate during the pandemic as opposed to any accelerated deterioration in target demographic demand for physical disc rentals," B. Riley analyst Eric Wold said in a Feb. 7 note on the company.

The company is a "victim of inconsistent and delayed film slate(s)," and its customer base will return as the film release slate recovers through 2022, Wold continued. Redbox depends heavily on new films when customers return DVDs they have already watched, the analyst explained, making the short supply of new releases particularly painful for the company.

The company said it increased costs and drew the remainder of its credit facility as it met the fourth-quarter 2021 challenges with increased marketing spend. As of the third quarter, Redbox had drawn $34.6 million from its revolving facility and had $15.4 million available. according to S&P Global Market Intelligence data.

Increasing marketing efforts when there is not enough content available to drive consumers back to kiosks is a misguided strategy, Wold said.

"We believe [increased promotional spending] to be an exercise in futility. Given the liquidity situation, lack of consistent title releases into the kiosks until late 2Q22, we believe RDBX can stay in front of its customer/loyalty base, but driving margins lower for a non-consistent visitation pattern may not make sense right now," the analyst said.

Wold maintained a "buy" rating on the stock but lowered his price target to $13 from $35.

Wedbush Securities analyst Alicia Reese also took "a step back" in her expectations for Redbox, maintaining an "outperform" rating but reducing her price target to $5 from $15.

"We view Redbox's current share price as a baseline for entry," Reese said in a note, also arguing that the stronger 2022 film release schedule should drive a return to the DVD kiosk business.

There were more film releases in the fourth quarter of 2021 than in the year-ago period, which should have driven better rental results for Redbox, but pent-up demand for out-of-home entertainment options following the long pandemic quarantine period likely weighed on the 2021 fourth quarter, Reese said.

"Competition continues to escalate, increasing the need for Redbox to quickly convert its DVD customers to streaming," Reese said.