Genius Brands (NASDAQ:GNUS) stock is trading just above $1 per share after skyrocketing from late May to early June. Shares of the entertainment company reached as high as $8 before flatlining, and it doesn’t look like the free fall will stop anytime soon.
Credit should be given where it’s due. CEO Andy Heyward has played the markets perfectly. His frequent press releases and positive spin on the news resulted in a surge by GNUS stock over the last three months. But analysts have caught on. And no amount of share purchases by Robinhood users will keep the stock from trading based on its fundamentals.
That’s why investors who haven’t gotten off Genius’ train yet really should.
Genius Isn’t Delivering
At this point, most investors are looking for results, and Genius isn’t providing them. Heyward promised that the company would become the Netflix (NASDAQ:NFLX) of children’s TV, but that hasn’t happened.
In recent months, the company has made several statements that are pure hyperbole. Not a week goes by when we don’t hear about another groundbreaking venture by the company. Many of these press releases are fluff pieces that help push up the stock for a short period before it craters back to earth.
The fact that Arnold Schwarzenegger has invested in GNUS stock is excellent news, but the markets want to know how that will help Genius’ bottom line. A look at the company’s recent quarterly results reveals the dilemma that Genius Brands is facing. In the first half of the year, the company generated less than $900,000 of revenue, representing a substantial decline of 46% versus the same period a year earlier.
The company’s app, Kartoon Channel!, now reaches over 100 million households and 200 million mobile devices.
But how is the app boosting the company’s financial results? How does Genius plan to monetize it? There isn’t anything to suggest that the company is making any progress when it comes to increasing shareholder value. Only progress in that area will ultimately attract capital and shareholders.
Stock Dilution Is Not a Good Solution
In a recent statement, the company clarified certain aspects of its recent 10-Q filing. Basically Genius noted that it had no corporate debt and plenty of cash. While that may sound reassuring, a more in-depth look shows that there are other issues to consider.
The company boasts that it has no long-term obligations. But that’s mostly because investors have opted to exchange their convertible notes for stock rather than settle for interest payments. That makes sense, since the stock soared in early June.
But many of those shareholders will not be happy that they decided to convert their notes, given the steep fall of the shares.
Although taking on an excessive amount of debt is bad. in small amounts debt is a better source of funds than stock. That’s especially true for a growing company. As of the end of Q2, the company had 218 million outstanding shares. Just a year ago, that figure was close to 22 million.
Heyward, Genius’ CEO, says the company has exciting new opportunities, and he thinks its (quite small) $52 million cash pile will help it accomplish that vision. However, if the company can only generate cash by issuing shares every few months, then it will be in trouble.
The Bottom Line
GNUS stock is suffering from fundamental issues that positive press releases cannot solve. Unless it starts generating a meaningful amount of income, the shares won’t be worth much moving forward. With a market cap of over $250 million, Genius Brands has to start posting strong financial results; the markets won’t be fooled by press conferences and weekly press releases anymore.
Going forward, the company will have to focus on increasing its revenue from its toys and/or its app going forward. In the last month, the shares have plummeted, and the bloodletting will only stop when investors start to see meaningful revenue. If Genius doesn’t deliver on that front, its shares will remain speculative.
Those who want to trade GNUS stock will have to keep an eye out for its upcoming press releases, since it will likely pop on any potentially positive news. But traders should not wait for the markets to absorb the information before unloading the shares.
For investors who value fundamentals, however, GNUS stock is a sell.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.