Redbox Entertainment (NASDAQ: RDBX) stock was up 24% yesterday and another 26% today premarket. Given the business they’re in – movie and DVD rental – this is a deeply odd price move given the problems Netflix has just revealed over that reversal in subscription growth.
The Redbox problem is that it’s stuck in the last, possibly the last but one, technological enclave. The business revolves around renting movies, DVDs, and so on from automated kiosks – vending machines effectively. Sure, they’re a few bucks each but as the decline of Blockbuster showed, there’s not exactly a great deal of growth in that market.
This is what makes their coming to market through a SPAC deal last fall rather odd. There was a bounce from their $11.90 opening, but they were down to $2 at the open yesterday. Not a grand success would be a polite way of putting that stock price performance.
The recent results show that the business continues to shrink. Revenues down, a move from profit to loss. They’re a shrinking company in a shrinking business – physical distribution of entertainment media just doesn’t seem like a growth business.
There is, of course, all sorts of speculation about how – whether – they’ll be able to move into online delivery and so revitalise the business. But this is where the Netflix results come in. Netflix, as we know, just reported that it’s losing subscribers as opposed to the expected growth. They’re going to bring in a new and lower-priced offering to try to turn that around.
Well, OK – but what does that tell us about the likely success of yet another company trying to enter the online delivery of entertainment market? We could also think of that launch of CNN+, which appears to have gained all of 10,000 subscribers.
This isn’t a promising background for Redbox Entertainment, that is. And yet the stock is up that 50% and more in just over 24 hours. So, why? What is going on here?
The answer seems to be that the analysts have been making their predictions for where the stock price will be. That’s their so-called “target” prices for Redbox stock. Back in Jan, UBS lowered its target from $25 to $16. Which is at least a move in the direction of reality. Much more recently, Riley named $10 as their target, down from $13. The consensus price is an amazing $12.20, which does seem like something of a stretch.
The actual driver of the current move may well be the Cannacord report which cut their Redbox target from $16 to $3. They also set a buy rating, given that is was around $2 at the time. Yes, of course, that’s a substantial cut from previous forecasts, but given current prices, it is at least a believable target price for Redbox.
The future valuation of Redbox is going to come from the success of any work they do to change their business model to something online. But given the problems that even giants like Netflix are having that’s going to be difficult.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.