When the internet becomes infatuated with a stock, that's a red flag for long-term investors, but it's not always a sign that you should stay away. Genius Brands (GNUS +0.59%) has been the subject of much online speculation as day traders have bid up the stock of the company that's trying to make a mark in the challenging space of offering children's television programming.
The company has courted comparisons to much bigger rivals with its own rhetoric describing its Kartoon Channel! in the following way:
We previously described Kartoon Channel! like "a Netflix for kids, but it's free." Our model is what is called in the industry, AVOD (Advertiser Video On Demand). There is an important significance to this, which in today's children's broadcast world, brings powerful 'wind to our sails'.
That's a lofty standard that Genius will struggle to live up to. The same shareholder's letter also mentions Disney's Disney+ streaming service. Genius Brands wants to play with the big boys, but it's going to face a very long road to actually become even a small player in the space.
"Stan Lee's Superhero Kindergarten" is one of Genius Brands' signature shows. Image source: Genius Brands.
Where does Genius Brands stand now?
The company has an impressive group of executives on board. Margaret Loesch, the founding president and CEO of Fox Kids Networks Worldwide, will serve as executive chairman of Kartoon Channel!. Former Walt Disney Television President David Neuman will fill the role of Chief Content Officer.
Genius Brands also has, on the surface, strong distribution.
"As we run up to the launch of Kartoon Channel! on June 15, we are all excited about the unprecedented carriage and launch footprint, which covers more than 100 million U.S. TV households and 200 million mobile devices, across cable, satellite, digital, and OTT platforms, including Comcast, COX, Dish, Apple TV, Amazon Prime, Amazon Fire, Roku, and Tubi, among them," the company said in a letter to shareholders.
However, the reality is different than the rosy picture the company presents. Being offered on those platforms makes it possible for people to view Kartoon Channel!. It does not mean they will, or that anyone will find the company's programming.
Genius Brands isn't being paid to put its programming on any of those platforms. It needs to attract viewers to monetize its content, and the company seems to understand how hard that will be.
"We want our shareholders to measure expectations. We will start providing projections beginning Q4, at which point we will have visibility on viewing patterns and advertising," the company shared.
Attracting viewers in a crowded marketplace with content that's largely unknown is a massive challenge. Genius Brands is trying to get attention by signing Arnold Schwarzenegger to star and co-produce a children's animated series, Stan Lee's Superhero Kindergarten.
That name may mean something to parents, but it's a pretty weak celebrity connection when it comes to appealing to kids. Genius Brands has very lofty goals, but it faces a massive challenge when it comes to actually getting anyone to watch its shows.
Should you buy Genius Brands stock?
It's very important to realize that Genius Brands is a speculative stock. This is a real company in that it has employees, an impressive management team, and a product, but it does not have an audience or much in the way of revenue.
The company lost roughly $1.7 billion from operations in its most recent quarter (and a total of $5.8 billion when you factor in non-cash items). It has about $10 billion in cash or cash-like assets. That gives it some runway, but not a lot.
If you buy shares in this company, you should understand that it's very possible that Kartoon Channel! will never produce a return on investment or find enough audience. Yes, there are lots of potential viewers, but those viewers have lots of options that may be more compelling.
This is an idea that may work, but the odds are almost certainly against it. Genius Brands is a potential growth stock, but it's also a major risk for going to zero. If you invest, do so carefully with full understanding that you could lose your investment.
