Robinhood has unlocked the magic of stock market investing for a new generation of investors with its low-cost and user-friendly investing app. But unfortunately, the platform has also introduced novice investors to low-quality companies with sketchy track records and poor financials. Some of these companies may even go bankrupt over the long term.
Here are three Robinhood stocks that might not exist five years from now:
Genius Brands International (NASDAQ:GNUS) is a struggling children's entertainment company that generates massive losses because of its low revenue and spiraling expenses. Cruise ship operator Norwegian Cruise Line Holdings (NYSE:NCLH) is struggling to survive the coronavirus pandemic. And finally, AMC Entertainment Holdings (NYSE:AMC) is a movie theater company facing a secular decline in its industry.
1. Genius Brands: Hype with no substance
Genius Brands is a children's entertainment company that caught the attention of Robinhood investors after it announced the launch of Kartoon Channel! a new kids education platform on Amazon Prime and other major streaming networks. The news sent the stock rocketing over 3,000% to a 52-week high of $11.73 in May before falling to as low as $1.66 at the time of writing.
Genius Brands followed its Kartoon Channel! announcement with several much-hyped business developments including a licensing deal with Arnold Schwarzenegger and a joint venture with Stan Lee's Pow Entertainment to monetize the comic book legend's unpublished intellectual property. But these new deals weren't enough to sustain the penny stock's massive valuation because management hasn't established a track record of turning hype into tangible value for shareholders.
If these new shows don't generate significant revenue, there is a real possibility that Genius Brands will go bankrupt within five years because of its stagnant revenue, low liquidity, and spiraling expenses.
The company reported earnings on May 18, and the results were a train wreck. Revenue fell 73% from $1.22 million to $0.33 million due to a collapse in television and home entertainment sales (even though the company's much-hyped Rainbow Rangers show was renewed for a second season). The company's operating loss also soared from $1.25 million to $1.77 million because of soaring general and administrative expenses.
Genius Brands only reports $2.76 million in cash and equivalents on its balance sheet and relies on equity dilution to fund its operations.
2. Norwegian Cruise Line: Low revenue and massive debt load
Norwegian Cruise Line may not exist five years from now -- but don't take my word for it. The company said as much in a May 5 SEC filing outlining "substantial doubt" about its ability to continue as a going concern because of coronavirus-related challenges in the economy.
With COVID-19 cases surging in the United States, health authorities have imposed a no-sail order preventing cruise ships from operating until Sept. 30. Unfortunately for Norwegian, this restriction has already been extended several times and may continue to be extended throughout the pandemic. To make matters worse, even when restrictions are lifted, international ports may be unwilling to allow ships originating from the U.S. to dock because of the high rate of infections in this country. All of this suggests the crisis could last deep into 2021.
Norwegian will struggle in this low-revenue environment because of its cash burn and heavy debt load. If the crisis continues on its current trajectory, the company may eventually find itself in bankruptcy court.
Norwegian stock has fallen around 75% year to date compared to the S&P 500's 1.14% loss as it piles on a massive amount of high-interest debt to stay afloat in these rough waters. The company ended the first quarter with $8.43 billion in long-term debt compared to just $1.36 billion in cash -- and its balance sheet has worsened in the second quarter. In May, the company closed an offering of $675 million in 12.25% secured notes followed by a July offering of $750 million in 10.25% secured notes and $400 million in exchangeable notes with a coupon rate of 5.375%.
As of March 1, Norwegian is in compliance with its debt obligations. But the new high-interest loans will put the company at greater risk of default if things don't quickly return to normal.
3. AMC Entertainment: Secular industry decline and potential acquisition
AMC Entertainment is another Robinhood stock that might not be around five years from now. Shares have already fallen by 44% year-to-date because of coronavirus lockdowns and a secular decline in U.S. movie theater attendance. With the pandemic resurging, the company's future looks increasingly grim.
AMC reported first-quarter earnings on June 9, and the results left much to be desired. Net losses expanded from $130.2 million to $2.18 billion because of a $1.85 billion non-cash impairment charge as the company wrote down the value of its theaters and business-reporting segments. AMC's second quarter will be even worse because the chain is generating virtually no U.S. revenue with locations closed.
With such massive challenges, it's no surprise that AMC reported "substantial doubt" about its ability to continue as a going concern in a June 3 filing with the SEC.
AMC plans to reopen some of its theaters starting July 30, and unlike the cruise industry, there isn't a federal restriction preventing the company from doing so. But even reopening won't solve AMC's biggest problem: A growing number of films are delaying their release dates or skipping theaters altogether in favor of video-on-demand (streaming) releases -- a trend that poses an existential threat for the company, even after the pandemic subsides.
The good news is that AMC's story might not end in bankruptcy.
Some analysts at Bank of America believe the movie theater operator is a prime acquisition target for streaming companies like Amazon or Netflix which could offer theater access as a competitive advantage over their rivals. That means Robinhood investors could still make good on their AMC investment if a larger firm decides to buy out the company.