Chicken Soup for the Soul Entertainment: Short Squeeze Potential

Every few years, a company comes along that makes for the perfect short squeeze play. In 2019 it was Beyond Meat (BYND). In early 2021 it was GME. In 2022, RDBX has rallied from under $2 per share as recently as April to over $17 in mid June. The purpose of this article is to lay out the case for why a little-known stock, related to Redbox, Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) owner of Crackle+ and a ton of video content, presents the best potential for a substantial short squeeze in the immediate future.

The fundamental arguments for why CSSE is worth a lot more than its current share price are made very eloquently and thoroughly in this well researched Seeking Alpha piece from early May. The author cites how the fundamentals look ‘fantastic’ and how the business is ‘clearly inflecting’. I concur with these comments and will add that on top of all this, the industry backdrop is strong and improving at a rapid clip as AVOD is the clear winner for home entertainment in an inflationary world in which viewers are scaling back on discretionary spending (such as Netflix (NFLX) or Disney + (DIS)) but still want to consume content.

However, the catalyst for CSSE being a compelling short squeeze candidate relates more to technical factors combined with its pending acquisition of RDBX announced May 11, 2022 and scheduled to close this quarter. The pending acquisition, which has been approved by the boards of both companies, allows CSSE to purchase RDBX by issuing just 0.087 shares of CSSE for each full share of RDBX and assuming their debt. Basically, CSSE is adding an entire major business with no cash out of pocket and minimal share dilution.

Strong Synergies and Aggressive Share Buybacks

CSSE CEO William Rouhana has sound fundamental reasons for making the acquisition. The value of Redbox’s relationships with every top supermarket and big box retailer in the US alone is worth well more than the price they are paying. Deep relationships with retailers such as Walmart (WMT), Kroger (KR), Albertsons (ACI), Walgreens (WBA), Publix and Dollar General (DG) are extremely valuable and would take a competitor years and hundreds of millions of dollars to try to replicate.

The amount of brand awareness and subsequent viewer growth that advertising on these 38,000 kiosks (which are seen by tens of millions of customers weekly) is well worth the price of the acquisition. This physical distribution network, combined with Crackle, overlaid on one of the largest film and television program libraries in the world, all owned by CSSE, makes for a powerful combination which is not even close to being reflected in the current share price. No wonder CEO Rouhana has been buying back shares hand over fist. From their recently filed 10-K: “Under the program, we have repurchased 1.6 million shares at an average price of $12.88 per share.”

While streaming is here to stay, the business model of AVOD had proven more attractive than SVOD as the US economy slips into potential recessionary territory. Rouhana’s timing may prove prescient. AVOD is the right part of the video industry to be in during this point in our economic cycle.

While the fundamental strategy seems sound and is interesting, it’s really the technical aspects of this stock and the behavioral characteristic of the Redbox ‘apes’ that make it compelling as a trade.

Meme Factor + Tiny Volume + Tiny Float

Redbox has a substantial meme trader following and frequently appears on the Stock Twits’ list of ‘trending’ stocks during the trading day. It is likely that a portion of these HODLERS will remain equally enthusiastic when their RDBX shares become CSSE shares, and here’s where it gets interesting. CSSE currently has less than 1/90th the daily average volume as RDBX. So there is the potential for a surge of buying activity in CSSE which will move the share price substantially higher than a similar amount of volume would have moved Redbox.

Such higher moves could, in turn, attract even more attention and further bolster CSSE’s bona fides as a meme stock extraordinaire. This virtuous cycle could have a flywheel effect that becomes self-perpetuating as shares continue to move higher. The company’s unusual name will only help its meme status.

Columnist Matt Levine of Bloomberg goes so far as to posit ‘once the deal closes you could always meme up the Chicken Soup stock, why not.’ Why not indeed?

CSSE has a float of only 6,090,000 shares of which 1,660,000 are currently sold short. To illustrate just how tiny this float is, it’s less than 10% of GME’s current float of 66 million shares. Avg. daily trading volume is a mere 264,200 vs. 23,000,000 shares trading in RDBX on average, less than 1.2 percent or more than 90 times lower volume than RDBX! Days-to-Cover are 5.5 for CSSE vs. 0.3 for RDBX or more than 18 times longer.

So where could we expect the price of CSSE to go to if a squeeze does materialize? Redbox traded more than 10x higher from a low of $1.61 earlier this year to over $17 per share. A similar move in CSSE, which I think has even greater upside potential, would put it at $43.50 (10x its 52-week low) implying a still reasonable market cap of $640 million, and still below CSSE’s 52-week high of $47.72.

Risks

Much has been legitimately written about the added debt load that CSSE will take on when it assumes Redbox’s debt. But the reality is, if the combination is successful and CSSE’s AVOD streaming business continues to grow, this is an entirely reasonable debt load and additional equity raises at much higher prices will be able to bring down debt levels accordingly.

Summary

In summary, Chicken Soup for the Soul Entertainment represents an attractive risk-reward scenario with the potential for a six-sigma upside move due to a potential short squeeze in its very limited share base. Both RDBX and CSSE have a relatively small float and significant short interest. But it is CSSE’s tiny average trading volume combined with the likely influx of new meme shareholders that make it a potential powder keg going forward. Should the stock trade higher than $60 per share, I would advise holders to start to reduce their position.