Like most deceptive investments, Genius Brands International (NASDAQ:GNUS) initially appears to be a very compelling opportunity. Its main motto is “Content with a Purpose,” or entertaining cartoons underlined with educational value. And for a moment, GNUS stock dominated the headlines with its mercurial ascent.
However, not all was what it seemed.
Given the tremendous enthusiasm surrounding Genius Brands, this isn’t going to be a popular opinion. However, in my time assessing viable and rational opportunities for investors, you tend to pick up a few things. Simply, what we have with GNUS stock is a classic pump and dump.
As I just mentioned, Genius Brands has an attractive narrative. According to a study in JAMA Neurology, the human brain grows “most rapidly just after birth” and reaches half its adult size within three months. From that point until adulthood comes the other half. Therefore, parents have a narrow window of time to rear their children for success.
However, the distractions of the modern age mean that toddlers to tweens — Genius Brands’ target user demographic — have multiple platforms to rot their brains. To address this problem, the company offers “infotainment” for kids. We know that kids are going to watch cartoons. Why not slip in some education while they’re at it?
Essentially, it’s the content world’s version of mixing in spinach with whatever your kids like to eat. In addition, a wave of lucrative-sounding announcements starting in May of this year saw GNUS stock skyrocket to exponential heights.
Sadly and predictably, the house of cards came down. Unfortunately, dilutive stock practices incentivized day traders to take profits. And those practices are still on tap, making Genius Brands too risky to engage.
GNUS Stock Is Fundamentally Bleeding Out
On June 5, near the year-to-date peak for GNUS stock, short-seller Hindenburg Research published a scathing article titled, “A Bagholder’s Guide to Why We Think Genius Brands Will Be a $1.50 Stock Within a Month.”
To the firm’s credit, GNUS stock closed out the month of July at $1.46.
But if you thought that was bad, InvestorPlace contributor Mark Hake suggests it might get worse. Because Genius is a chronically dilutive organization, it’s possible that GNUS could become a literal penny stock. Though that would be a staggering decline from where we are, the upside potential is difficult to imagine.
For several years, the company has burned cash. Moreover, the growth picture doesn’t provide even the foolhardiest speculator with much confidence. For instance, in its first quarter of 2020, Genius only generated sales of $340,000, down 72% from the year-ago quarter.
Further complicating matters for GNUS stock is the underlying balance sheet. Management only has $2.76 million in cash and equivalents, while carrying $2.29 million in long-term debt. Thus, to fund operations, Genius Brands must continually dilute its shares. There’s a reason why so many analysts are bearish on the company — the underlying business just isn’t sustainable.
And all this points to the obvious, that Genius doesn’t have compelling content. Largely, what has driven shares higher was hype. Eventually, such narratives die a quick and ignominious death.
A glaring example is Genius’ partnership with comic book legend Stan Lee’s POW! Entertainment. At first glance, getting the Stan Lee name under your belt seems like a coup d’état. That is until you realize that this deal involves property outside the Marvel Entertainment universe.
With Disney (NYSE:DIS) taking the good stuff, Genius is an also-ran.
Saved by Robinhood Geniuses?
Despite the many troubles weighing on GNUS stock, it does have one major catalyst: a rabid fanbase. Not a day goes by when you don’t see social media equity warriors play up the dubious thesis for Genius Brands and slam those who think otherwise.
That’s due in no small part to Robinhood. A trading platform that appeals particularly to younger investors for its ease of use, GNUS is one of its most popular tickers. Whipping each other into a frenzy, you’ll see them urging believers to load up the boat, sometimes for no other reason than it’s a trading day ending with “y.”
Yet that’s also the problem with GNUS stock. Without a substantive catalyst, it’s subject to the whims of human emotion. Sure, that could take shares dramatically higher, as we just witnessed. But it’s also a recipe for disaster if you don’t watch what you’re doing.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.