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Every few years, a company emerges that makes the perfect short squeeze work. 2019 is Beyond Meat (BYND).In early 2021, it is GME. 2022, Relational Database has gone from less than $2/ The most recent share in April was over $17 in mid-June. The purpose of this article is to lay out why a little-known stock associated with Redbox, Chicken Soup for Soul Entertainment (Nasdaq:CSSE) with Crackle+ and a lot of video content, most likely to have a massive short squeeze in the near future.
The rationale for why CSSE is worth much more than its current share price is presented very eloquently and thoroughly in this well-researched article Look for Alpha works from the beginning of May. The author cites how the fundamentals look “great” and how the business “has changed significantly.” I agree with the comments and add that beyond that, the industry backdrop is strong and rapidly improving as AVOD is the clear winner in home entertainment in an inflationary world where audiences are shrinking discretionary spending (e.g. as Netflix (NFLX) or Disney+ (DIS)) but still want to consume content.
However, the catalyst for CSSE to be a compelling short squeeze candidate has more to do with the combination of technical factors and its impending acquisition of RDBX Announced on May 11, 2022 and is scheduled to end this quarter. The pending acquisition, approved by the boards of both companies, allows CSSE to purchase RDBX by issuing only 0.087 CSSE shares for each of its entire shares of RDBX and assume its debt. Basically, CSSE is growing the entire main business with no cash out of pocket and minimal share dilution.
Strong synergies and aggressive share buybacks
CSSE CEO William Rouhana made the acquisition for good reason. Redbox’s relationships with every top supermarket and big box retailer in the U.S. are worth far more than the prices they pay. Deep relationships with retailers such as Walmart (WMT), Kroger (South Korea), Albertson (ACI), Walgreens (WBA), Publix and Dollar General (dangerous goods) is very valuable and will take away competitors year And hundreds of millions of dollars in attempts to replicate.
The brand awareness and subsequent audience growth of advertising on these 38,000 kiosks (seen by tens of millions of customers every week) is well worth the acquisition price. This brick-and-mortar distribution network, coupled with Crackle, covering one of the largest libraries of film and television programming in the world, all owned by CSSE, makes for a powerful combination that isn’t even reflected in the current stock price. No wonder CEO Rouhana has been buying back shares.from their most recent File 10-K: “Under this program, we repurchased 1.6 million shares at an average price of $12.88 per share.”
While streaming is here to stay, AVOD’s business model has proven more attractive than SVOD’s as the U.S. economy slips into potential recession territory. Ruhana’s timing may prove prescient. At this point in our economic cycle, AVOD is the right part of the video industry.
While the basic strategy looks sound and interesting, the technical aspects of this stock and the behavioral characteristics of the red-box “ape” make it attractive as a trade.
Meme Factor + Tiny Volume + Tiny Float
Redbox has a large number of meme traders and is frequently featured on Stock Twits’ “trending” stocks list during the trading day.Some of these HODLERS are likely to keep the same enthusiasm when their RDBX stock turns into CSSE stock, and This is where it gets interesting. CSSE’s current average daily trading volume is less than 1/90 of that of RDBX. As a result, CSSE’s buying activity could surge, which would push the stock well above a similar amount of Redbox trading volume.
This higher move, in turn, is likely to attract more attention and further support the CSSE Sincerely As an extraordinary meme stock. This virtuous cycle can have a flywheel effect that can perpetuate itself as stock prices continue to move higher. The company’s unusual name only helps its meme status.
Bloomberg columnist Matt Levine Even assuming “you can always remember chicken stock stocks once the deal is done, why not.” Why not?
CSSE has only 6,090,000 shares outstanding, of which 1,660,000 are currently sold short. To illustrate how small this float is, it’s less than 10% of GME’s current float of 66 million shares. The average daily trading volume is only 264,200 shares, compared to RDBX’s average trading volume of 23,000,000 shares, which is less than 1.2% or more than 90 times lower than RDBX! CSSE is 5.5 days, RDBX is 0.3 days, or more than 18 times.
So, if a squeeze does occur, where can we expect the price of CSSE to go? Shares of Redbox have risen more than 10-fold from a low of $1.61 earlier this year to more than $17 a share. A similar move by CSSE, which I think has more upside potential, will take it to $43.50 (10x its 52-week low), which means a $640 million market cap is still reasonable and still below CSSE’s 52-week low The high was $47.72.
risk
Much of what has been written about the additional debt load CSSE will take on Redbox’s debt is legit. But the reality is that if the merger goes through and CSSE’s AVOD streaming business continues to grow, it’s a perfectly reasonable debt load, and additional equity financing at a higher price would be able to reduce debt levels accordingly.
generalize
All in all, Soul Entertainment’s Chicken Soup represents an attractive risk-reward scenario with the potential for 6 sigma upside due to a possible short squeeze on its very limited stock base. Both RDBX and CSSE have relatively small liquidity and substantial short interest. But it’s CSSE’s negligible average transaction volume, combined with the potential influx of new meme shareholders, that makes it a potential powder keg for the future. If the stock is trading above $60 per share, I recommend that holders start reducing their holdings.
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