On its face, the story of Genius Brands (NASDAQ:GNUS) stock admittedly looks intriguing. Genius Brands has some interesting intellectual property. Its executives have substantial industry experience. And GNUS stock suddenly is an awful lot cheaper.
Indeed, GNUS has plunged from brief highs above $10 in early June to barely $1 as of this writing. It’s still been one of the best stocks of 2020, gaining 270%, but the recent performance has been disappointing, to put it mildly.
The problem with GNUS stock, however, is that the story gets much less intriguing, and much more concerning, upon closer inspection. A good chunk of the IP isn’t actually owned.
The cheaper price is explained in part by extraordinary dilution so far this year. And management concerns persist.
It’s possible GNUS finds a bounce. It’s even possible that Genius Brands delivers on some of the potential it claims to have. But I wouldn’t be on it yet — and I certainly wouldn’t take that bet just because the stock has plunged over the last couple of months.
The Case for GNUS Stock
The case for GNUS is based on the company’s potential to be a key player in the streaming world. In Q2, the company launched Kartoon Channel!, a streaming platform that includes owned and licensed content.
As Genius Brands management has put it, the company aims for Kartoon Channel! to be a “Netflix (NASDAQ:NFLX) for kids.”
Kartoon Channel! now is available in over 100 million TV households, in addition to more than 200 million mobile devices. The channel is available through streaming devices like those from Roku (NASDAQ:ROKU) as well.
Kartoon Channel! offers programs like Rainbow Rangers (which also is broadcast on cable network Nick Jr.) and Llama Llama. It’s working with POW! Entertainment, formed by comic book great Stan Lee, to develop more programming. That IP underpins efforts to develop the “Stan Lee Universe”.
And as chief executive officer Andy Heyward put it in the Q2 release, the game plan for that universe is to develop a new Marvel Entertainment, after Lee helped build the first one.
Marvel was acquired by Disney (NYSE:DIS) in 2009 for $4 billion. Genius Brands has a market capitalization under $250 million at the moment. And so it seemingly only takes one hit for GNUS stock to rally. Genius Brands has more than a few efforts underway, and veterans from major studios and media companies leading those efforts.
Looking Closer at GNUS Stock
It sounds like an intriguing, if unproven, story, but much of that story starts to fall flat upon closer inspection.
Take, for instance, the oft-cited figures about the reach of the Kartoon Channel! 100 million TV households sounds impressive, but that reach is driven solely by VOD (video-on-demand) offerings through cable and satellite providers. Genius Brands likely isn’t getting paid affiliate fees (as traditional networks are) for those offerings, but getting a piece of the ad revenue.
The same is true of the 200 million mobile devices figure. All that figure means is that the channel has apps for the Apple (NASDAQ:AAPL) iPhone and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) devices. There are thousands of streaming video providers that can say the same.
Even the “Netflix for kids” formulation seems to miss an awfully important point: there already is a “Netflix for kids”. It’s Netflix, which has a massive content library for children. Obviously, so does Disney+.
The efforts around the Stan Lee Universe too have some concerns. Heyward, before merging his A Squared Productions with Genius, spent years developing one of the Lee properties, to no success. The remaining IP has little awareness and potentially little value.
To be fair, it’s possible Genius Brands winds up succeeding. But we don’t yet have much evidence that it will. Certainly, the company hasn’t succeeded yet. In the first six months of 2020, the company generated less than $1 million in revenue. It burned $2.3 million in cash in the process.
Dilution and Management
Genius Brands also diluted shareholders to a staggering degree in the first half of the year. As of Aug. 14, the company had 219 million shares outstanding. The share count was less than 30 million at Mar. 29.
Any investor interested in GNUS stock at $1 has to wonder about the issuance of those 189 million shares. It amended a warrant agreement to sell 500,000 shares at 34 cents in January. In March, in exchange for $11 million in cash, the company issued $13.75 million in face value worth of debt and granted 65 million warrants with an exercise price of just 26 cents per share.
4 million more shares were sold in March at slightly less than 26 cents. More issuances followed, with the highest-priced coming on May 28 — $1.50 per share.
All told, Genius sold 180 million shares at a weighted average price below 40 cents. Why, then, should the stock be worth $1 if Genius itself doesn’t believe it is? It’s not even as if the company needed the cash just to survive: it has about $55 million in cash, and now no debt, as the convertible bond was repaid in stock.
Heyward, at least, made out well. He personally funded $1 million of the convertible bond offering, which was a handsome deal for the buyers.
Add all of the concerns up, and the GNUS story simply doesn’t look all that impressive. Revenue remains minimal. Management’s presentation of the Kartoon Channel! makes the platform sound like more than it really is. And there isn’t an obvious niche for Genius Brands to enter — at least, not one that isn’t already dominated by entrenched media giants.
Yes, GNUS stock is cheaper. But that’s because the stock saw something close to a bubble in early June. At 45x trailing twelve-month revenue, GNUS stock obviously isn’t cheap. It certainly doesn’t seem cheap enough.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.