Over the past few months, shares of Genius Brands International (NASDAQ:GNUS) have gone on an incredible ride. If you'd managed to buy shares at the absolute bottom on April 2, and get out at the (so far) top on June 3, you'd have captured an insane 3,350% in gains. In two months.
So why the big run-up? In short, bulls have become convinced that the company is set to be the next streaming-media darling.
But since that peak, shares have fallen every trading day (at this writing) and are now down about half off the high. This follows a filing with the Securities and Exchange Commission disclosing a number of investors in a March offering plan to sell some of their shares (possibly at enormous profits) in the very near future, and a report from a short seller poking several holes in the thesis that Genius Brands is set to be a big winner from here.
Should investors be loading up on the big recent dip in its stock, or is it time to get out or stay away? Let's take a closer look at the company, the stock, and the prospects for Genius Brands to become the next big media company.
A decade of negative returns underpins the bear thesis
Any analysis of Genius Brands needs to start with its history. Sure, "past results don't guarantee future returns" and all that, but the fact is: Genius Brands has spent more than a decade destroying investor capital. Its share price is 98% below the price at which it went public:
And yes, that includes the insane returns we've seen in its share price in recent weeks.
Let's talk about why. In short, the company has been the equivalent of warming your house by burning money:
Genius Brands has never had any consistent large source of revenue, and certainly hasn't -- so far -- been able to deliver any content that's generated meaningful economic value. To the contrary, it's consistently generated negative operating and free cash flow. And the negative cash flow has gotten progressively bigger over time.
So how has Genius Brands managed to stay in business? By finding people to buy stock:
That's right: Its share count has increased more than 52,000%.
This is central to the bear thesis. The company has spent more than a decade consuming millions and millions of dollars of investor capital without hitting it big. Is that really likely to change on the strength of Rainbow Rangers, a show of middling success, and other intellectual property that's limited and has generated no meaningful return so far?
Netflix for kids?
On the bullish side, investors point to the Rainbow Rangers show as only being one cog in the wheel that will power Genius Brands' growth. Bulls -- and the company itself -- also point out that Genius Brands has a deal with Mattel for a new line of toys based on the show's characters that's set to land on Walmart store shelves in August, when the next season of the show premieres on Nick Jr. (Nick Jr. also has an economic interest in merchandise sales).
Additionally, its upcoming Kartoon Channel!, which will be available in over 100 million households and on 200 million mobile devices, is expected to be a major driver. Genius Brands recently named Margaret Loesch executive chair and David Neuman chief creative officer of Kartoon Channel!. These aren't nobodies: Loesch founded and was CEO of Fox Kids Networks, was CEO of Marvel Productions before that, and president of The Jim Henson Company even earlier. Neuman was president of Walt Disney Television, and vice president of comedy at NBC (a Comcast subsidiary).
This has led some to say Genius Brands could be the Netflix for kids. That's a bold statement for a company with little result to back it up, but management has added some serious talent to develop, and built Kartoon Channel! into something big.
Additionally, the company pointed out that it has a very strong balance sheet after recent funding rounds, with far more cash than debt, which should support its development needs for years to come. CEO Andy Heyward also pointed out that, although some investors are cashing in on the massive run-up of the stock price, he has made significant personal investments in the stock in recent years without selling a single share. He's also not registered in the recently disclosed group of investors who are selling.
Is Genius Brands a buy today?
If you go by the company's public history, the answer is no. Besides Llama Llama (which short-sellers have pointed out it doesn't own, but licenses from the author of the popular books), it's had no highly recognizable shows with broad, lasting success, and even Rainbow Rangers has had limited success so far. Moreover, it's spent the past decade occasionally putting its hand out, asking investors for a little more money every so often to keep it in business. Investors have lost a lot of money as a result.
Can the addition of some new executives with proven backgrounds in kids' TV and network building finally turn Genius Brands into a winning investment? It does have a solid balance sheet that should help avoid the need to raise more capital for a few years, and with a market capitalization below $400 million at recent prices, it seems there's some room for error in the possible range of valuations.
But with that said, I fall sharply on the side of "prove it." Management has done a lot to tout its prospects. But what it hasn't done is walk investors through the potential economics of its content, or its new channel, and the company certainly hasn't shown winning financial results.
It's hard to put a value to Genius Brands when it doesn't tell investors the economic value of its assets. Until it starts to show that in its results, or offers more detail on the economics of its business, I won't buy. This investment is fraught with risk: The company continues to burn cash, and has not delivered positive financial return for investors who've put their capital on the line. Until that changes, Genius Brands doesn't make the cut for me.