Shares of struggling children’s entertainment company Genius Brands (GNUS) have been on a rocket-ship rally lately. On May 6, 2020, NASDAQ: GNUS at https://www.webull.com/quote/nasdaq-gnus announced the planned launch of its Kartoon Channel! It is a digital network, a children’s educational platform that will be hosted on several major media platforms including Amazon Prime, Apple TV, and Comcast. The news supercharged every investor’s interest in the stock, sending shares soaring 995% from about $0.32 on May 5 to $3.45 at Thursday’s close. And that is just actually down from a recent high of $7.93 on June 3, 2020.
Even though it is unclear what long-term impact it has on the Kartoon Channel! will have on Genius Brands’ business over the long term, the optimism looks a little overblown considering the fundamental weaknesses in the company and questionable managerial decisions the company has been taking. Here are two reasons to sell Genius Brands stock before shares fall back down to earth:
Poor Fundamentals:
Genius Brands has always been nominally considered a growth stock, and that has always meant investors should expect some level of cash burn until the business achieves enough scale to be profitable. But Genius Brands’ growth trajectory is much less consistent than growth investors like to see. It has been noticed that the cost of goods sold (COGS) and selling, general, and administrative (SG&A) expenses have increased at much faster rates than revenue over the past eight years.
Genius Brands reported first-quarter earnings on May 18, and the results were a disaster like never before. Total revenue dropped 72% year over year from $1.22 million to $334,739, while losses from operations expanded 42% from $1.25 million to $1.77 million. The poor performance is due to weakness in the Genius Brands’ television and home entertainment segment. And so far, the company has a limited track record of developing successful media products.
Equity Dilution:
Genius Brands is at high risk for equity dilution because of its massive cash burn and low stock price. Equity dilution occurs when a company raises capital by issuing additional shares. This increases the total number of shares outstanding and puts downward pressure on the value of existing shares in the company. By selling its stock for lower than the market price, Genius Brands is giving the new buyers a very good incentive to buy their shares in such a high-risk company. But these shares come at the expense of legacy shareholders, who will face dilution in the near future if the new buyers unload their positions into the open marketvia paper trading app. Disclaimer: The analysis information is for reference only and does not constitute an investment recommendation.
