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The market’s hottest stock is a name you might know, but a winner you probably didn’t expect. Shares of Redbox Entertainment (RDBX -13.01%) have more than quadrupled over the past two weeks. Yes, that Redbox. 

It’s fair to argue that the upticks haven’t been exactly earned by the company that seems to have lost its relevance over the years. The company behind the automated vending machines outside of select retailers that spit out movie discs and video games has had its share of problems over the years. Do you even own a DVD or Blu-ray player anymore? 

However, the stock’s surge on a burst of trading volume finds market speculators connecting the meteoric ascent to the surge we saw in AMC Entertainment Holdings (AMC -2.19%) and other meme stocks last year. Despite media distribution models that have been largely fading over the past two decades — DVD sales peaked in 2005 and the multiplex record for the most tickets sold was set in 2002 — hope springs eternal when the online masses rally around retro charm. Redbox is back, but the sustainability of its gains could prove flimsy.

Image source: Getty Images.

That’s entertainment

Redbox hit the market in October as a SPAC — special purpose acquisition company — deal. It rose 24% to close at $11.90 on its first day of trading, but it was all downhill after that. The stock was trading below $2 when the surprising rally began two weeks ago.

You won’t find traditional bullish catalysts behind the stock’s bottle-rocket flight to the stars. If anything it’s been negative developments making headlines over the last two weeks. Canaccord analyst Austin Moldow slashed the price target on the shares from $16 to $3 a couple of days into the rally. Moldow pointed out that Redbox had recently reduced its workforce by 150 employees and tapped its revolving credit line. Financial results were below the firm’s already lowered expectations. 

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Last week it was the CFO leaving the company. Redbox announced Kavita Suthar would be leaving the company on May 16 to spend more time with her family. 

Redbox knows the shortcomings of its business model. It knows that its roughly 40,000 kiosks aren’t getting the same kind of activity it got two decades ago. The demise of Blockbuster and other human-manned rental retail concepts was more an omen than an opportunity. Redbox has expanded its retail presence to include streaming content, and it has tried to follow better-financed players into acquiring content. It’s the right approach, but it’s a crowded market. Three months ago the stock lost nearly half of its value in a single day after warning that its business was in trouble. 

Can being the latest meme stock help breathe new life into a broken business model? B. Riley analyst Eric Wold put out an upbeat note on Redbox this week. Wold sees Redbox following the blueprint AMC carved out last year, raising capital to shore up its balance sheet with its stock surge. Profitability may not be on the horizon anytime soon, but taking advantage of its red-hot stock could provide it the financial means to clean out its debt balance while also providing the funds to pull off its diversification strategy. The analyst is sticking to a buy rating and the earlier $10 target on the stock. 

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A lot is possible now that trading volume and the stock itself are on the rise, but you probably know how these meme tales often play out. The higher they rise, the harder they fall when we run out of plot twists and the end credits start to roll.

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