What’s next for Genius Brands (NASDAQ:GNUS)? In May and June, the children’s entertainment company’s shares went parabolic. But, as speculators realize there’s more sizzle than steak behind this streaming play, shares have cratered back to earth. Hitting highs in the double-digits in early June, GNUS stock today trades for just $1.20 per share.
Is this a “buy the dip” situation? Not so fast! Granted, some have laid out a bull case for this company. There’s potential for both its entertainment franchises, as well as its streaming service, to surge in popularity in the coming years. Even if it doesn’t give established names like Disney (NYSE:DIS) and Netflix (NASDAQ:NFLX) a run for their money.
That being said, there’s no guarantee Genius is on the path to success. That is to say, while a massive potential “payoff” (shares surge again, as the company’s fortunes improve) could happen, the potential for such a scenario is so remote it fails to overcome massive risks.
What do I mean? Hemorrhaging cash, additional dilutive share offerings are likely in its future. Without them, the company won’t be able to keep the lights on. While a precarious balance sheet hasn’t hurt many “story stocks” in today’s market, this one could be the exception.
Sure, you can roll the dice with this stock at today’s prices. But, for those who like to invest rather than gamble, steering clear may be the best call.
The Bull Case for GNUS Stock
While I sound bearish so far on this stock, I concede there’s still a (remote) pathway for shares to rebound.
As our own David Moadel wrote Aug 17, the company has inked a toy deal with Mattel (NASDAQ:MAT) for its Rainbow Rangers franchise. Such tie-in deals could help fuel popularity for the franchise, which in turn could help drive more subscribers to Genius’s Kartoon Channel platform.
Yes, speculators got ahead of themselves bidding up GNUS stock earlier this summer. But, even if the company doesn’t become a streaming powerhouse, there’s substantial upside potential if its franchise/streaming businesses take off in coming years.
Yet, that doesn’t mean the company doesn’t have massive hurdles to climb. It’s tough for an outsider to break into the media business. An oligopoly among “old school” media conglomerates, and “new school” big tech, any small upstart is going to have a tough time penetrating the market.
So, with the bull case a mixed bag, what about the bear case? There’s plenty more at play to justify the case shares continue falling to lower prices.
‘All Sizzle’ Means GNUS Stock Heads Lower
Investors who bought in during the hype earlier this year are angry. And, they’re not just ruing their losses. There’s now a shareholder lawsuit, with investors accusing Genius Brands of making “false and misleading statements” regarding several potentially game-changing developments out of the company.
As this commentator recently wrote, the company is fighting these claims. But, this development further makes the case it’s all sizzle and no steak with GNUS stock.
Sure, there’s the possibility this children’s entertainment also-ran beats the odds, and turns its stable of franchises into a multi-million dollar business. But, as I mentioned above, this is a market dominated by much larger players. Poorly capitalized, it needs to raise more money to achieve any of its outsized goals.
Yet, such capital raises will dilute shareholders. Back in July, InvestorPlace’s Mark Hake discussed how share offerings could impact Genius’ share price. With a smaller piece of the pie, those buying today should expect lower-than-expected appreciation in their shares.
If everything goes to plan, of course.
Otherwise, if Genius Brands stumbles, and Rainbow Rangers doesn’t become the next Paw Patrol, expect shares to fall back below $1 per share. And, if the stock falls below the dollar mark, don’t expect it to stay listed on the NASDAQ for long.
In turn, once trading over-the-counter (OTC), a large amount of the retail investor interest will disappear. How so? Given investors on the Robinhood app can’t trade OTC stocks, what helped fuel the rally in late May/early June (the “Robinhood effect”) won’t return for a second round.
Don’t Stick Around for This Deflating Story Stock
Yes, story stocks like this one have been great trades so far in 2020. But, as the hype fades with Genius Brands stock, it’s not wise to stick around. Sure, there’s still a long-shot bull case here. The company’s franchises (namely Rainbow Rangers) could deliver, and turn this content also-ran into a emerging media player.
But, chances are the company struggles to break into the media oligopoly. Instead, expect more dilution, as the company raises cash to keep the lights on. Barring a second round of the “Robinhood effect,” expect GNUS stock to keep on tumbling from here.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
