Genius Brands Is Overvalued and Its Growth Outlook Is Uncertain

It’s been exactly one year since Genius Brands (NASDAQ:GNUS) stock touched its high of $11.73. Today, GNUS stock trades some 85% lower at $1.80.

An image of two young girls looking at a tablet and smiling while an adult reads in the background.
Source: Syda Productions/ShutterStock.com

I am reminded of a bearish view published by Hindenburg Research back in June. The report concluded that GNUS “appreciated in value by more than 20x on relatively mundane news.” It also said that “the stock will drop as quickly as it skyrocketed.”

Of course, it might not be a good idea to short a penny stock. However, currently GNUS still looks expensive and unattractive from an investment perspective.

As an overview, Genius Brands is a media company that’s primarily in the business of marketing, producing and licensing kid-focused content. Maybe most interesting is the company’s Kartoon Channel! offering, which is available in “over 100 million U.S. television households via a broad range of distribution platforms.”

However, what’s more important here is the valuation. For the first quarter of 2021, the company reported revenue of about $1.1 million. This would imply an annualized revenue of $4.4 million. Currently, though, GNUS stock trades at a market capitalization of $541 million. Therefore, this stock is trading at 122.9 times fiscal-year 2021 revenue.

Clearly, valuations are stretched here, even after a big correction from all-time-highs. It’s also worth noting that there is no clear revenue guidance from management. So, while this company does have aggressive growth plans, its cash burn and potential for further equity dilution could keep GNUS stock depressed.

GNUS Stock: The Positives

In the last one year, there has been a massive equity dilution with GNUS stock. This is one of the reasons behind its sharp correction. However, the good news is that, as of March, Genius reported cash and equivalents of $143 million. As such, it has robust financial flexibility to pursue organic and inorganic growth.

Additionally, in the last annual letter, CEO Andy Heyward talked about the hiring of Bedi Singh and Jason Adelman, who are both seasoned M&A veterans. If Genius can pull off a promising acquisition, the entire bearish thesis for this stock will likely change.

Plus, in another growth initiative, the company announced that 240 hours of new content will be coming to its Kartoon Channel! platform. This is a potential revenue upside trigger.

Concerns Abound

However, there are still some concerns that are hanging over GNUS stock right now.

For example, in its Q1 2021 report, the company also talked about its Stan Lee’s Superhero Kindergarten program surpassing 16 million views. However, the company reported advertising revenue of just $0.75 million for the quarter. Additionally, licensing and royalty revenue came to approximately $0.17 million. These figures show that the business needs to scale views significantly in order to deliver healthy revenue and cash flows.

It’s important to add here that Kartoon Channel! is free to watch. Therefore, the company largely relies on that advertising and licensing for its revenue upside.

Additionally, Genius Brands is looking at international markets for growth. For example, the next season of one of its hit animated series, ​Rainbow Rangers, will be available to international audiences through Netflix (NASDAQ:NFLX) and other streaming platforms soon.

This is certainly a positive development. However, the impact on revenue is still uncertain here. In fact, the current price action does not suggest that the markets are counting on any significant bump-up.

The Bottom Line on GNUS Stock

Genius Brands reported cash used in operations of $5.9 million as of Q1 2021 (Page 33). This would imply an annualized cash burn of nearly $24 million. With the company still at an early stage of growth, cash burn is likely to sustain.

At the same time, it’s important to note that content creation is the key to growth in Genius’ viewers and subscribers. Therefore, investing activity is likely to remain high as well. This might necessitate more fundraising in the next 12 to 24 months.

It seems to me that the markets still have a lack of trust with management here. Even with a flurry of positive news, GNUS stock has not seen any significant upside. As such, I believe that the market’s perception will change only if management delivers sustained growth and game-changing acquisitions.

For now, this stock looks unattractive from an investment perspective. That said, it’s crucial to point out that GNUS stock has a short interest of 14.1%. Any positive news could trigger a short squeeze. So, while I remain neutral to bearish on the stock, it would also be best to avoid taking any short positions here.

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On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


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