“Meme stock mania” may have cooled down. But, over-hyped Genius Brands (NASDAQ:GNUS) stock continues to trade at an inflated valuation. The children’s entertainment company faces big hurdles. Not only does it face competition from the still-dominant media conglomerates. Big tech’s moves into streaming make it tough to compete as well. Yet, investors continue to overestimate how much this potential this company’s media properties and streaming app (Kartoon Channel!) truly have.
The situation today isn’t as ridiculous as it was last summer. Back in June, Genius Brands shares went to the moon, soaring from less than $1 per share, up to prices in the double-digits.
While shares aren’t as inflated now as they were nearly a year ago, don’t expect today’s prices to last. Lacking the financials to back up its current valuation, expect GNUS stock to tumble, after this recent pump shifts to an inevitable dump.
With little room to gain, but plenty of room to fall, continue to avoid this stock.
GNUS Stock: Separating Hype from Reality
It’s understandable why some think Genius Brands is a potential winner. The popularity of streaming continues to rise, as U.S. households “cut the cord.” And, even the number of major streaming apps expands, there may be room for a niche player like this one.
On paper, this sounds like a great opportunity. But, looking at the financials, it’s clear reality doesn’t match up with the hype. As of this writing, Genius has yet to release results for the quarter ending Dec 31. But, we do have results for the quarter ending Sept. 30, 2020.
The verdict? Consider this a company not ready yet for prime time. For the quarter, sales were down substantially (around $274,000), compared to the prior year’s results (nearly $3.5 million). Now, this isn’t an apples-to-apples comparison. 2019 was the year it recognized revenue from licensing one of its media properties, Llama Llama, to a major streaming app.
What do these numbers reflect? The fact Genius remains many steps away from living up to the ambitions it laid out in this investor presentation. The company may believe it has everything in place to grab a meaningful share of this market. But, given that big media and big tech continue to dominate this, it still has much of its work cut out for it.
Add in other concerns, like shareholder dilution and valuation, and it’s clear this stock offers a bad risk/return proposition for investors.
Plenty of Room for Big Declines
This small fish in the entertainment space has a lot to prove. But, although shares trade at a fraction of their 2020 highs, GNUS stock remains priced as if it’s growth strategy will go off without a hitch. Right now, the stock sports a nearly $300 million market capitalization. But, revenues over the past twelve months were just $1.92 million. In order to justify its current valuation, it needs to see tremendous growth in the coming years.
Admittedly, with its $50.5 million war-chest, it may have enough capital to turn its media properties, as well as its streaming service, into a cash cow. But, this war-chest was the result of last year’s dilutive capital raises. Genius Brands sold new shares of stock many times in 2020, culminating with a $58 million direct offering in October.
So far, investors haven’t been too concerned with the shareholder dilution going on with small-cap “story stocks” like this one. But, while the direct offering helps to bolster this company’s balance sheet, it could negatively affect long-term returns. Why? With shareholder dilution, the pie (a company) is cut into many more slices (outstanding shares).
Doing this minimizes the level of gains investors will see, if the company manages to live up to expectations. Compare the limited room for gains against the risks shares fall back to pennies after an inevitable dump (more below).
In short, there’s little reason to buy this stock. Even if you are a growth-minded investor with a healthy risk appetite.
Bottom Line: Stay Away from Genius Brands Stock
In mid 2020, we saw this stock get pumped, and then dumped. This second go-around may not be as massive. However, with little supporting today’s valuation, the next inevitable dump could be painful for those buying the stock today.
How painful? Shares could fall back to prior price levels (under $1 per share), if it becomes more clear it won’t gain a foothold in the children’s media market. With more room for shares to fall rather than bounce back to last year’s highs, stay away from GNUS stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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