Genius Brands (NASDAQ:GNUS) develops, creates and acquires multimedia content. The company has massive intellectual property holdings from famed comic book producer Stan Lee and owns Kartoon Channel!, a distribution platform that CEO Andy Heyward has described as as the “Netflix for kids, but free.” But all this does not explain why GNUS stock is up 27.5% year to date and why this fledgling entertainment company has a market cap of $474.6 million.
Genius Brands has disappointed and overpromised. Management has done a great job so far talking up the product. But there is little to show for it otherwise. Genius Brands was formed in November 2013 from the merger between A2 Entertainment and pre-merger Genius Brands (former Pacific Entertainment). It is no spring chicken.
But its status as a meme stock has helped propel the company to unprecedented heights. If recent history is any indicator, a short squeeze is always around the corner. So, retail traders are piling into this one.
However, there are silver linings that make me cautiously optimistic about the company.
From December 31, 2020, to March 31, 2021, cash in hand increased by more than 40% to $143 million, quite a lot of moolah to pursue an aggressive acquisition activity. With that goal in mind, GNUS hired Bedi Singh, an ex-CFO of Sony Pictures and SVP Finance of 20th Century Fox, to pursue more acquisitions.
Finally, with close to 16.3% of the share count short, I believe the chances of a short squeeze are high. It’s tough to predict where the Reddit crowd will invest next. But one thing is for sure. Redditors’ declaration of war on hedge funds has made unlikely winners out of several companies. Chief among them are those that have an elevated short interest.
For all these reasons, I am cautiously skeptical about Genius Brands.
GNUS Stock Has Fallen off Serious Highs
The markets are not for the faint of heart. If you wanted any indication, look at the oscillation seen in GNUS stock. As I write this, shares have a 52-week high of $3.63 a pop and a 52-week low of 95 cents.
This price action is purely down to retail trading. However, if you take a closer look, there is enough of a story here that warrants a look after the steep correction.
Genius Brands has an existing lineup, including Rainbow Rangers for Nick Jr. and Llama Llama for Netflix (NASDAQ:NFLX). There is a smorgasbord of other shows the company produces, with more on the way, thanks to massive intellectual property holdings (owned through a proposed joint venture) from famed comic book producer Stan Lee.
Content is king. Genius Brands CEO Andy Heyward knows a thing or two about content, considering he co-created Inspector Gadget and has produced over 5,000 episodes of children’s programs. Currently, the company is doing all it can to acquire more original content and license valuable IPs.
GNUS can sell its content all over the world and there is no time limit. The entertainment company also looks for products that can be merchandisable so that GNUS can sell licenses to commercialize toys and other consumer products.
Conditions Ripe for Acquisition Activity to Accelerate
GNUS has said that it would use cash to acquire more targets. With over $140 million in cash on the balance sheet, no debt, and access to a further $100 million, it can afford to have an aggressive acquisition strategy.
GNUS has tapped two seasoned veterans, Bedi Singh and Jason Adelman, to lead the charge. It’s tough to say how many acquisitions will ultimately add to the bottom line. The intangible nature of intellectual property means it’s often harder to value, difficult to define, and challenging to price fairly.
However, Genius Brands is in the content business. If you want to remain relevant, you have to keep adding to your library. Otherwise, you can get lost in the shuffle. Netflix will spend $17 billion on content this year as pandemic restrictions loosen and production resumes.
Wells Fargo (NYSE:WFC) estimates that Disney (NYSE:DIS) spent $28.9 billion on new content for their direct-to-consumer (DTC) division in 2020, including projects for Disney+, Hulu, and ESPN+. In the current fiscal year, it is estimated Disney will spend $30.5 billion on new content.
So, you get my drift. If you want to remain in the game, you need to spend money on content. On that front, Genius Brands has the money, which should pique your interest.
Buy the Dip
Genius Brands plies its trade in the entertainment industry, with media for children being its specialty. Over the last year, we saw an astronomical rise in the price for its stock, mainly due to Reddit-fueled retail activity.
However, now the stock is coming back to earth. And you can judge it on its merits.
Genius Brands is not profitable yet. And management has a history of hyperbolic press releases that do not have much substance, meant solely to push GNUS stock up. But with the price correction, significant cash reserves and new executive appointments, the company is putting the right foot forward.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan 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. Faizan does not directly own the securities mentioned above.