Redbox Entertainment (NASDAQ:RDBX) is up about 20% today, following a similar 25% gain on June 7. RDBX stock appears to be caught in a short squeeze, being treated as a meme stock by retail investors.
The fact RDBX stock has gained over 80% in the past five trading sessions doesn’t make a lot of sense. After all, the company recently agreed to sell itself to Chicken Soup for the Soul Entertainment (NASDAQ:CSSE), which is acquiring it in an all-stock deal valued at $375 million.
The transaction, which has been approved by both companies’ boards, is expected to close by the end of 2022. That begs a question: Why bid up RDBX stock if it will soon no longer exist?
What Is Happening with RDBX Stock?
This is not the first time investors have executed a short squeeze on RDBX stock. Back in April, retail investors helped it climb 347% — from $1.91 on April 11 to $8.53 on May 2 — before shares crashed back to earth. By mid May, Redbox traded at just over $2.50. Now, though, it’s changing hands at more than $10 per share with no apparent regard for the company’s sale to Chicken Soup.
Based in Illinois, Redbox specializes in movie and video game disc rentals, which are available to consumers through automated kiosks placed in retail locations like grocery and convenience stores. It’s an outdated business model that has led to financial struggles for the company. Earlier this year, Redbox announced that it was laying off 10% of its workers amid slumping sales. The company also said it was looking for “strategic alternatives.”
RDBX stock made its public debut last fall via a reverse merger with a special purpose acquisition company (SPAC). Initially, shares traded as high as $27.22 before falling to less than $2. Professional traders on Wall Street heavily shorted the declining stock, making it ripe for a short squeeze.
Why It Matters
Redbox has remained a popular topic of discussion on Reddit despite the sale of its business. Under terms of the deal, RDBX stockholders will receive a fixed ratio of 0.087 of Class A common stock of CSSE for each RDBX share they own. With the acquisition, Chicken Soup gets the company’s collection of 38,000 dispensing kiosk locations “as well as digital media services spanning ad-supported and transactional video services.”
With the terms of the sale having been finalized, the current move higher in RDBX stock will not likely have an impact on the transaction. Rather, it seems retail traders are having one last kick at the can with Redbox shares before it disappears for good.
What’s Next for Redbox
Investors should keep in mind that stocks caught in short squeezes tend to fall just as quickly as they rise.
It’s not clear how long the current squeeze in RDBX stock will last, or how high the share price will ultimately go. However, the run is not likely to last long, judging by past efforts. Given that Redbox has been sold and that its ticker symbol will disappear by year’s end, there’s little reason for investors to get involved in the drama playing out with Redbox today.
On the date of publication, Joel Baglole did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
