Penny stocks have surged in popularity over the past few months as newly minted day-traders try their hand at playing the stock market. That’s led to some fascinating trends— like explosive rallies among bankruptcy stocks and a flurry of interest in a handful of other otherwise-unknown companies. Genius Brands International (NASDAQ:GNUS) stock is the latest penny stock to join the party— the firm’s ad-supported streaming service saw a boost during the pandemic. But will that momentum last? Probably not.
GNUS stock is a unique streaming play for two reasons. First, it’s Kartoon Channel focuses solely on children’s programs and second, it’s free. Unlike most of its competitors, Genius is taking it back to basics with an ad-supported streaming service boasting a hefty portfolio of kids shows. While they may not be the blockbuster hits that Disney (NYSE:DIS) is offering, it has managed to source several series starring big-name children’s characters and secure deals with big-names in the business.
Why GNUS Stock is Getting Hot
You can’t blame investors for looking into GNUS stock in recent weeks. The stock went from trading at just 30 cents per share to just under $8 in June. While it’s back down around $1 per share now, Genius saw a 10% leap between Tuesday and Thursday on news that the company acquired some new content.
This week Genius Brands announced that it added both Sonic the Hedgehog and Pac-Man to its portfolio, both of which are spin-offs from popular video game characters. The stock initially popped during premarket trading but later gave up the majority of those gains, finishing the day up roughly 8%.
The threat of another massive lockdown has kept streaming stocks afloat— especially those that offer children’s content. Parents working from home need a way to keep their kids entertained, and a free channel sounds like a goldmine.
Shaky Growth Story
But there are a few problems with this theory. The first is quality. While the shows themselves might be popular, the advertisements that make them free to watch could be a problem for many parents and kids. Plus, they probably already have access to some type of children’s programming through another streaming service or traditional cable. Turning to a little-known streaming service seems like a last resort.
On top of that is the fact that many kids are back in school as evidence points to low rates of transmission among children. This time around, not only is the world better prepared to avoid another huge lockdown, but schools will probably be one of the last things to close.
Pump and Dump Trouble
Perhaps the most worrying thing about GNUS stock is its legal issues, which suggest the firm intentionally misled investors so that insiders could profit. Unfortunately, that situation is extremely plausible.
Penny stocks are dangerous investments for a good reason— the majority of them turn out to be worthless. Their movements up, and sometimes down, are often based on smoke and mirrors. Anyone willing to consider a penny stock like GNUS should already be skeptical simply based on the fact that its shares trade for one dollar.
But the fact that two lawsuits regarding questionable business practices were filed at the end of August underscores the risk of picking up a company like Genius Brands. It’s probably worthless, or at least, worth much less, that whatever management says.
The Ride is Over for Genius
A lot of investors have turned to penny stocks in order to profit in a bloated market, and while it’s risky, that doesn’t mean it’s the wrong strategy. But with that said, the average investor— especially a long-term investor, should not be sniffing anywhere near GNUS stock.
Genius looks to be on the downslope no matter how you slice it, especially if there’s any truth to the firm’s growing legal problems. For that reason, I wouldn’t come anywhere near Genius Brands no matter what hyped-up press release they put out next.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.