Genius Brands (NASDAQ:GNUS) could propel itself into a major studio. As of Mar. 31, it has $143.6 million in cash and no debt, according to its latest 10-Q filing. Moreover, it has become a major independent kids’ studio and media channel. In short, GNUS stock has a chance of skyrocketing. But that is only as long as Genus Brands does not misspend its cash on unprofitable acquisitions that won’t provide a good return on investment (ROI).
Perhaps because the market is willing to give the company a chance, GNUS stock is up about 24% year-to-date (YTD), from $1.38 at the end of December to $1.71 on Jul. 21. At the time of that closing price, Genius had a market value of $514 million. So, the $143.6 million in cash represents roughly 28% of its market value.
Here’s what you need to know about GNUS stock moving forward.
GNUS Stock: What the Business Is Worth
When it comes to GNUS stock, I suspect that the market actually thinks that this cash will allow the company to transform itself through acquisitions. For example, revenue during the first quarter was just $1.1 million. So, unless its sales for Q2 show a marked improvement, it seems clear that the market is relying on the cash to provide some kind of firepower.
However, there could be a good reason to believe that revenues will start to kick in. On Jul. 13, Genius Brands announced that a new program on its Kartoon Channel! had “40 million views to date.” This was following only “a few short months” of the new Stan Lee’s Superhero Kindergarten being on air — after 11 episodes and with 15 more to go.
Of course, the company does not say what this means in terms of revenue. However, the show can be streamed on TVs, mobiles devices and more. It’s also distributed through a wide variety of cable providers and services like Amazon (NASDAQ:AMZN) Prime. So, let’s try to estimate what it might be earning.
For example, if it sells ads for $20 per CPM — and assuming there are say 10 million views per month — the total monthly revenue would be $200,000. This is seen by multiplying $20 by 10 million divided by 1,000 (or $20 x 10,000) for $200,000. Let’s then say that there is an equal amount of merchandise sold, in terms of the Kartoon Channel! take. At best, that would be $1.6 million per quarter in revenue. And, just to be generous, let’s call it $2 million per quarter.
That is just not a lot of money. And it doesn’t justify a market value of $514 million. For example, let’s suppose there are some other programs like Superhero Kindergarten for Genius Brands and that at best this makes $4 million per quarter. That annualizes out to $16 million a year. But the price-to-sales (P/S) multiple is still high in this case. After subtracting the $143 million in cash, it puts the Kartoon Channel! on a P/S multiple of about 23 times (i.e., $514 million – 143 million, or $371 million / $16 million).
Where This Leaves GNUS Stock
Effectively, this guess work means that the company will have to spend the $143 million wisely on acquisitions or “tentpoles” (as management likes to describe it) that can transform the company. The problem is, though, that this is going to be very hard to do. It’s so easy to make a wrong move, especially in this space — there’s just no guarantee that any new projects will be worthwhile.
So, if the company is smart, they will stick to proven assets, franchises or brands that are already generating cash. That way, they can become more experimental down the road and risk capital on new startup shows or projects.
Last quarter, GNUS put out a shareholder letter describing the kind of assets they are looking to acquire in detail. I wrote about this in my last article. Now this quarter, CEO Andy Heyward wrote to shareholders and mainly described the performance of some of the shows. But Heyward did not focus on how Genius was going to spend its cash.
That leaves shareholders wondering how well Genius will spend its reserves. In the end, how it uses the money will have a huge effect on GNUS stock’s future performance — perhaps bigger than anything the company is doing now.
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On the date of publication, Mark Hake did not own (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.