Insights

Why Redbox Tanked 11% at the Open Today After Rocketing 23% Yesterday

What happened

At the open of trading on Aug. 2, Redbox (NASDAQ: RDBX) shares fell roughly 11%. That comes just a day after the company, which provides physical and digital video rental services, saw its stock explode 23% to the upside. There was no news out of the company on either day, with the last news release having come out in late May and the most recent SEC filing in mid-July.

So what

The thing about this one-day turnaround is that such volatility is the norm for Redbox right now because it has gotten caught up in the meme stock madness. The really big problem with this is that Redbox has agreed to sell itself to Chicken Soup for the Soul (NASDAQ: CSSE) in an all-stock deal for what, given the current price of Chicken Soup for the Soul, will amount to less than a dollar a share. That’s what the July SEC filing was about. Redbox currently trades for around $4.50 per share. In other words, if this deal goes through as currently envisioned, investors buying today stand to lose a lot of money.

The big jump yesterday was likely driven by Redbox being listed by a website as a top short squeeze stock for August. That’s not a tactic that long-term investors should be playing around with, and today’s price retreat shows why. Essentially, meme investors got all excited yesterday because Redbox was on some list and have started to move on to other, more exciting things today. Rapid swings like this are common with meme stocks, where emotion and not investment facts are the real driving force of price moves. In the short term, emotion is very important on Wall Street, but over the long term, hard facts generally win the day. And the hard fact here is that Redbox has a merger agreement with Chicken Soup for the Soul that is for materially less than what Redbox shares are trading at today (even after the notable stock drop).

Now what

Long-term investors should watch the Redbox drama from the sidelines. Maybe meme stock traders will score big here, if the merger agreement gets altered in some way, but the financial risks here are just too big for most to bother with this volatile and risky name. Today’s drop is yet another warning that Redbox is a stock that most investors should probably avoid.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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