Like with other meme stocks, Genius Brands (NASDAQ:GNUS) stock saw a short-lived boost early last month. But following the quick end to that latest wave of Reddit enthusiasm, shares in the children’s media play slid back below $2 per share.
The problem? It may have more room to fall. Sure, GNUS stock is down from the prices it hit during the initial meme stock wave back in February. Not only that, it’s far below the double-digit prices it briefly hit over a year ago.
But after its highly dilutive capital raises last year, at today’s prices the stock sports a market capitalization of $500 million.
Compare that to the company’s trailing 12-month revenues ($3.2 million), and it simply doesn’t add up. To just sustain its valuation, it needs to scale up quickly. Is this possible? Perhaps.
The silver lining is that Genius Brands has $143 million in its coffers. With this cash, it could execute a game-changing mergers and acquisitions transaction. Or it could use the proceeds to develop new intellectual property to complement its Llama Llama and Rainbow Rangers media franchises.
The company found success monetizing these existing properties via product licensing deals. New intellectual property could help bolster the prospects for its budding Kartoon! Channel streaming service as well.
GNUS stock has a lot of potential. But until it starts taking action or conveying to investors that big revenue growth is around the corner, the best move may be to steer clear of this once over-hyped, but still overvalued, media stock.
GNUS Stock and its Unsustainable Valuation
Are those bearish on Genius Brands (such as myself) too focused on past results, and not enough on future results? Maybe. The company’s main area of focus right now, Kartoon! Channel, could be set to grow substantially in the years ahead.
The issue, though, is the lack of projections saying this will be the case. Without such projections, it’s hard to justify this stock’s $500 million+ market capitalization. For now, this valuation could hold. But at some point, the meme stock saga will come to a close. Hype will again take a back seat to fundamentals.
Once this happens, GNUS stock won’t be able to hold onto its current valuation for long. If its streaming unit fails to deliver in the upcoming quarters, there’s a chance that this stock falls to a price equal to its net cash. Divide its net cash of around $140 million by its share count (300.79 million outstanding shares), and you get a worst-case scenario price target of around 46 cents per share.
This isn’t an inevitability. If it puts its war chest to good use, GNUS stock may have a path to maintain its current share price. Or at least, soften the blow on the way down.
How Genius Brands Can Avoid a Big Decline
GNUS stock today trades at a valuation far above its underlying asset value. But thanks to its cash position, it may be able to buy itself out of trouble by quickly putting that cash to good use, via acquisitions.
The company could use the money to acquire privately held media companies. Or even to develop new intellectual property organically. It could also merge with a similarly sized company in the streaming space, like Cinedigm (NASDAQ:CIDM).
In fact, I included Genius Brands as a possible acquirer of Cinedigm, when breaking down possible future M&A deals in the media industry in late May. That company is already its streaming distribution partner for Kartoon! Channel. There may be material synergies in combining this company, with its cash and content library, with a company that needs cash to expand its streaming efforts, as well as in need to grow its content library.
Granted, Cinedigm shareholders would likely balk at swapping their stock for overvalued GNUS stock. But if the cash component was big enough, and the premium substantial, it may be able to pull it off.
The Bottom Line
It may sound good in theory. But at best, a tie-up between Genius and Cinedigm is a remote possibility. This factor is hardly a reason to buy this stock today. Despite this company’s cash position giving it many options, the clock is ticking.
Once the hype that’s bolstered meme stocks for the past year finally fades, this one is at high risk of a major sell-off. Until we start seeing this company take more action, or at least indicate that rapid growth is just around the corner, the best move with GNUS is to wait and see, and stay away for now.
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On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.