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Watch Out as the Rally in Genius Brands Fizzles

Since the onset of the novel coronavirus caused many children to stay at home for days on end, some companies are seeking to capitalize on this phenomenon. Genius Brands (NASDAQ:GNUS) is one of those companies, and some traders may consider GNUS stock an interesting pandemic-era wager.

stock market icons of a blue bull and a red bear (overvalued stocks)
Source: Shutterstock

Speculators would likely point out that GNUS did, in fact, post massive gains in early June. That incident showed, it seems, that a very nimble trader with uncanny timing could garner returns of 10 times or more in a matter of weeks.

GNUS stock is now trading at a discount compared to its June peak price. However, let us not confuse a price discount with a good value. Timing is everything in stock trading, and the timing isn’t necessary right to take a long position in GNUS.

A Closer Look at GNUS Stock

Unfortunately, GNUS has “falling knife” written all over it. That’s an allusion to the old saying that investors shouldn’t try to catch a falling knife, or an asset that’s declining quickly in price.

This might contradict the old adage that investors should buy when there’s blood on the streets. (Is it just me, or are an awful lot of violent financial idioms?) Buying at severely depressed prices might make sense if a stock has a history of consistently recovering from price dips.

GNUS stock, however, doesn’t have such a history. Over the long term, it hasn’t recovered from dips and only gone lower. And the June spike to nearly $8 per share was short-lived as the GNUS price fell back to $1.81 by July 24.

Plus, the daily trading volume has fallen off since early June. That’s not an encouraging sign for the bulls, who undoubtedly would like to see greater participation and, of course, higher prices. Given GNUS’s history, though, higher prices might be temporary if they even occur at all.

Strong Competition Is an Issue

To start off with the basics, we should first answer the question of what Genius Brands does. InvestorPlace contributor Chris Tyler’s precise précis sums it up concisely: “The company offers a streaming video on demand entertainment source for children called Kartoon Channel.”

At first glance, it might seem that GNUS is a right-place, right-time type of investment in the era of the Covid-19 pandemic. Kids are being cooped up at home for hours or even days at a time. They’re bored out of their minds and seeking entertainment.

The problem is that bigger companies with much deeper pockets are already capitalizing on this opportunity. In this vein of thought, Tyler makes a great point that streaming behemoths like Disney (NYSE:DIS), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) collectively spend around $3 billion annually on children’s content.

Not the Next Netflix

With a valuation of roughly $450 million, Genius Brands is no match for its mega-scale competitors. Still, hope springs eternal, as they say. In early June, traders bid up the GNUS share price because they were hoping that Genius Brands would be the next Netflix (NASDAQ:NFLX), or at least the Netflix for kids.

As evidenced by the pop-and-drop price move in GNUS stock, their wager hasn’t paid off so far. Hype and hope aren’t enough to sustain a massive stock-price ascent. Genius Brands needs to execute in terms of audience and revenue growth.

To achieve this, Genius Brands needs to gain traction with its kids’ content. However, as InvestorPlace contributor Luke Lango put it, Genius Brands is basically just an afterthought in the domain of kids’ legacy media.

Programs like Rainbow Rangers and Llama Llama haven’t been the smash hits that Genius Brands’ stakeholders were hoping for. Genius Brands might have to develop new content in order to increase its market foothold.

However, that’s an expensive proposition and this company isn’t exactly flush with capital like Disney, Amazon, and Alphabet.

The Bottom Line on GNUS Stock

After the pop in GNUS stock came the inevitable drop. Sure, the shares are cheaper now, but cautious investors shouldn’t ignore the strong competition against Genius Brands.

Thus, trying to catch the falling knife in GNUS will likely cause substantial damage.

David Moadel has provided compelling content and crossed the occasional line on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

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