Genius Brands' (NASDAQ:GNUS) massive rally is fizzling out. With a price of $2.22 as of Friday morning, the stock has fallen by more than 80% from its all-time high of $11.73 -- and unfortunately, there is probably still more downside to come, because management has failed to deliver concrete value to shareholders.

Genius Brands' recently announced Stan Lee deal is much ado about nothing, and its financials are a train wreck due to massive quarterly losses and skyrocketing expenses. Here are two reasons why investors should consider selling the stock before it's too late.  

Pile of money in an overturned trashcan.

Image Source: Getty Images.

1. The Stan Lee deal lacks substance

On July 6, Genius Brands announced a new joint venture with Stan Lee's POW! Entertainment to create Stan Lee Universe -- a new media company that will have worldwide rights to the Stan Lee's intellectual property and unpublished content. Genius Brands CEO Andy Heyward didn't miss the opportunity to hype the new deal:

This is the Holy Grail. Stan Lee Universe is a once in a lifetime asset drawn from over 100 original, heretofore unexploited properties, created by the most successful creator of intellectual property of our time. In my view, the potential value in this single asset, is greater than any IP anywhere in Hollywood.

But despite the hype, management has failed to explain how this joint venture will help the company's bottom line or provide value to shareholders in the form of revenue growth or profits. Walt Disney already acquired Stan Lee's most valuable intellectual properties (Spider-Man, Iron Man, Hulk, etc.) with its $4 billion acquisition of Marvel Entertainment in 2009. 

The assets acquired by Genius Brands -- which include little-known titles like Tomorrow Men, Stringbean, and Virus -- will not be recognizable to the company's child audience. And it is unclear why the the Genius Brands has decided to purchase this IP instead of developing its own. 

2. A track record of overpromising and under-delivering 

This wouldn't be the first time Genius Brands has over-promised and under-delivered. In November 2018, the company released its Rainbow Rangers show on Nick Jr., with management promising "significant growth over the next two years" after the show was renewed for a second season in the fourth quarter of 2019. The company also renewed its preschool program Llama Llama for a second season on Netflix. 

However, despite these seemingly positive developments, Genius Brands has been unable to report sustainable revenue growth, while expenses have continued to spiral out of control. 

Genius Brands reported first-quarter earnings on May 18, and the results were not impressive for a supposed growth company. Total revenue fell 73% from $1.22 million to $0.334 million due to a 94% collapse in its Television & Home Entertainment segment, despite the new shows. Meanwhile, the company's operating expenses continue to rise steadily, despite the inconsistent revenue. 

Marketing and sales expenses jumped 38% to $0.113 million, while general and administrative expenses increased 7% to $1.76 million. 

Takeaway 

Genius Brands is a classic example of the dangers of penny stock investing. Small, thinly traded companies tend to be cheap for a reason -- their risks outweighs their rewards, and they are often poorly managed. 

Genius Brands' new deal with Stan Lee is more hype than substance. And the company's fundamentals remain weak because of spotty revenue and out-of-control administrative expenses. Investors should avoid the stock until management turns the hype into something tangible.