In a May 13 column, I urged investors to take “a small, bullish” position in Genius Brands (NASDAQ:GNUS) in the wake of its downturn. On June 9, the shares hit $2.30. Now that they have since fallen back below $1.50, I think it’s a good time to buy more GNUS stock.
I remain bullish on the outlook of Genius because the audiences for its top shows continue to grow and its recent reviews appear to be quite strong. What’s more, I still believe that Genius could easily become a takeover target. That possibility, in turn, limits the risk posed by its stock, making its shares’ risk/reward ratio quite positive.
In its first season on Netflix (NASDAQ:NFLX), Genius’ Rainbow Rangers show is already extremely popular with viewers. Jon Ollwerther, the president of Genius’ Kartoon Channel! and the firm’s EVP of Business Development, said in a statement on Aug. 2:
“the series cracked the Top 10 of children’s programs … and is consistently a top performer in Netflix categories such as ‘Girls Take the Lead,’ ‘Everyone’s Watching,’ and ‘Exciting TV Shows.'”
Meanwhile, after being launched in April, its Stan Lee’s Superhero Kindergarten had already reached 40 million views in July after just 11 episodes. It is the most popular show on the Kartoon Channel!, having drawn in “a greater than 900% increase in unique users.”
Third-Party Validation of Genius’ Content
Many prominent streaming outlets are carrying Rainbow Rangers, including Amazon’s (NASDAQ:AMZN) Amazon Prime, ViacomCBS’s (NASDAQ:VIAC) Paramount Plus and several international TV names.
Moreover, Genius recently selected Markan Industrial Group’s Never Wrong Toys as its partner for Rainbow Rangers toys. Neither appear to be large firms. Still, the fact that Genius continues to recruit new manufacturing partners bodes well for the company and for GNUS stock.
Other companies that have made products based on Genius’ shows include Mattel (NASDAQ:MAT), Macmillan Publishing and Scholastic (NASDAQ:SCHL).
Meanwhile, some recent consumer reviews of Genius’ Kartoon Channel! have been very positive.
For example, one reviewer, who posted on Aug. 4, wrote, “Great shows for the kids and no cost … Also has educational options, I think as it grows will only become better and it’s already a winner.” Another review posted on July 20 exclaimed, “Absolutely love this!!!! I do a lot of babysitting and all the kids love it.. educational and fun. Thank you.”
Genius Is a Prime Target for Acquisition
Genius’ audiences appear to be growing rapidly, and consumers’ recent reviews and the company’s large number of distribution deals indicate that this trend will continue.
As Genius’ shows attract more viewers, the company should be able to recruit more distribution partners and make more licensing deals. And importantly, as its shows become more popular, these agreements should become much more lucrative.
Moreover, I continue to believe that, as I stated in my previous column, Genius could easily become a takeover target. With so many huge companies looking for ways to attract more consumers to their streaming services, I expect they would be willing to pay at least $300 million to $500 million to acquire Genius.
That’s because its popular Kartoon Channel! will give a meaningful spike to an acquiring company’s audience. Those gains should only expand over time as more kids start watching the channel. The kids’ parents can get roped into the acquirer’s adult shows, making them potential subscribers even after their children get too old for Genius’ programs.
The Risk in GNUS Stock May Prove Worthwhile
So with GNUS stock trading at a market capitalization of $460 million, I believe the shares pose a limited amount of risk. If the stock’s market cap falls to, for example, $200 million, I think an acquirer will look to buy the company for $300 million to $400 million.
In five years, Genius could very well become like a smaller Disney (NYSE:DIS) with many successful toy lines, movies, TV shows and even a couple of theme parks. At that point, GNUS stock would be worth four or five times its current value.
As a result, I think that the shares’ risk-to-reward ratio is very favorable, and I recommend that investors buy the shares following their recent pullback.
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On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.