Genius Brands International (GNUS) has a history of buildup which results in the sky-rocketing of the share price based on speculation of better performance. Nonetheless, the company has a feeble track record of delivering on their promises which is next-to-never-reflected in their financial statements. GNUS is a true reflection of the age-old notion “all that glitters is not gold”. In this article, I will reveal my findings along with a recommendation based on an expert opinion that I have formed from the information that we have in hand.
Built on allure or is it really flimflam?
GNUS is a company built on collaborations with celebrities and award-winning actors as a part of their top tier creative teams. However, despite the star-studded name list, the financials clearly do not add up to the hype reflected in the share price.
Genius associates itself with “content with a purpose” portfolio which includes,
- “Llama Llama” starring Jennifer Garner who voices “Mama Llama”.
- “Warren Buffet’s Secret Millionaires Club” – an entrepreneurship series.
- “Rainbow Rangers” which debuted on Nick Jr. back in 2018.
- “Thomas Edison’s Secret Lab”.
- “Baby Genius” – the preschool show.
- Followed by Marvel Comics primary creative leader “Stan Lee’s Superhero Kindergarten” starring Arnold Schwarzenegger which is to debut in 2021.
In addition, through licensing agreements with leading partners, characters from “Genius Brands” investment portfolio also appear on a wide range of consumer products for the worldwide retail marketplace.
Down in the dumps
For nearly a decade, GNUS has struggled with poor performance due to the weakness in the Genius Brands’ television and home entertainment segment. At present, the current running “content with a purpose” portfolio has thus far been fruitless to power a sustainable revenue growth stream. Meanwhile, the operating income is a complete wipeout due to the high operating expenses which is why we have repeatedly witnessed a loss-making company.
Yet, the share price has soared beyond any day traders’ wildest dreams. The stock was hovering at $0.28 at the beginning of 2020, but by early June, GNUS share price had soared a staggering 2,800% based on twofold speculation of prospects. Since mid-June, the stock has shed more than half its value owing to inside selling of millions of shares due to a major cash burnout which had set a further pressure on Genius Brands stock price. GNUS is currently trading 45% above last week’s price of $2.45 and is still 1,200% up YTD.
Speculation A: Walt Disney deal on the cards, or not?
GNUS is on a buyout rumor involving the owners of the “happiest place on earth”, none other than Walt Disney. The Disney takeover rumor may be heightened because Andy Heyward, the current chairman and CEO of Genius Brands, was the former chairman and CEO of DIC entertainment which he sold to none other than Walt Disney, where he took on the management function for 7 more years under the stewardship of Walt Disney. Notably, the Disney takeover rumor is the case of a report that came from a fan blog DisneyGuide, which is entirely unaffiliated with the “Magic Kingdom”, establishing the fact that the rumors are once again baseless and most likely creating aimless chatter to boost the share price.
Speculation B: Do you believe in makeovers?
To add to the buildup, GNUS most recently announced the launch of its Kartoon Channel digital network, a children’s educational platform that guarantees fun, family-friendly, and free premium content which will be hosted on several major media platforms. The superficial propaganda that the newly introduced “Kartoon Channel” will do well, once again raises the question that the company is unprofitable and has no proven track record to speak of. Yet, without a clear improvement witnessed in financials, GNUS should still be considered a high-risk stock.
The social costs of this growth are glossed over
GNUS is in an extremely delicate position due to its weak financial position with only $2.8 million in cash and cash equivalents on its balance sheet compared to $14.1 million in warrant derivative liabilities, which can be eventually converted into common stock thereby diluting equity. Due to the massive cash burn, Genius Brands is at high risk for equity dilution. Equity dilution occurs as the company tries to raise capital by issuing new shares, which on the other hand puts downward pressure on the existing market price of the share. This makes the stock quite attractive for the new buyer as it is at a significantly discounted price and with the reputation for high volatility gains it might just be an incentive to close the deal. However, the new buyers will gain at the expense of the existing shareholders, who will face dilution if the new buyers unload their positions into the open market. Genius Brands does not appear to be concerned about the implications of exercised warrants on their current shareholder value position.
Re-affirmation: Schwarzenegger deal
A recent production deal with Arnold Schwarzenegger who chose warrants to purchase shares of Genius Brands as part of his compensation for starring in and co-producing the company’s new animated series “Stan Lee’s Superhero Kingdom” which is scheduled to launch in 2021 on Amazon Prime in the US and Alibaba broadcast platform in China, is seen by many investors as a catalyst for future growth. The warrants will allow Schwarzenegger’s company, Oak Productions, to purchase approximately 2.16 million shares of Genius Brands common stock at an exercise price of $1.39/per share on 25th May 2021, or the day the Superhero Kindergarten premiers – whichever comes earlier.
Buy on the rumor, SELL on the facts
The proposition of a buyout or partnership with a major entertainment company or even on the notion that the Kartoon Channel bringing in the desired revenue stream is all based on rumor and speculation and has already driven the share price uphill. It is high time to take account of facts. GNUS Price/Book ratio is 23.6 ($3.55/$0.15) which is high compared to its industry P/B ratios. In addition, GNUS cash to debt ratio was at 0.03 as of December 2019, which was lower than the industry average of 0.10 and the sector average of 0.14. The company is issuing an alarming number of new shares and warrants, and this will probably cause the stock to underperform over the long term due to equity dilution and is a red alert to all investors to quit while you are ahead.
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