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2 Reasons to Sell Genius Brands Stock

By Will Ebiefung – Aug 28, 2021 at 7:51AM

Key Points

  • Genius Brands has a long history of underperforming, despite its interesting intellectual property.
  • The company's revenue is not growing fast enough to offset its massive expenses.

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Second-quarter revenue soared. But so did operating losses.

Genius Brands International (GNUS 0.11%) investors haven't had much to smile about in 2021. Shares in the small-cap children's entertainment company have fallen 50% from their 52-week high, and more declines are likely as management continues to burn cash and issue more shares -- a painful combination.

Let's explore two reasons why it might be time to jump ship. 

1. Second-quarter earnings are a mixed bag. 

Genius Brands licenses multimedia content for toddlers and tweens with its flagship network, Kartoon Channel!, available on major online media platforms like Amazon Prime, Alphabet's Google Play, and Roku. It also earns revenue from media advisory services, advertising, and other related businesses. 

Stock chart crashing into a crater

Image source: Getty Images

Second-quarter sales jumped 318% year over year to $2.34 million based on a surge in licensing and royalties. Genius Brands also boasts a 909% increase in unique users on Kartoon Channel! (to 21 million) and strength in other "tentpole" assets like Rainbow Rangers, which became available on ViacomCBS' Paramount+ in August

But despite the impressive top-line results, Genius Brands is struggling to create value because of its out-of-control spending. Total operating expenses more than tripled to $9.9 million, leading to an operating loss of $7.6 million in the period. The losses could expand as Genius Brands invests in new content such as Shaq's Garage, which began production in the second quarter and is expected to air on Kartoon Channel! next year.  

2. Management is too expensive

Shareholders benefit when companies use their cash to create assets that will drive revenue (and hopefully profits) in the future. But it is much harder to measure the positive impacts of executive compensation. And Unfortunately, Genius Brands is spending most of its money on the latter. 

As of the second quarter, general and administrative expenses increased 200% year over year to $7.1 million -- or 72% of operating expenses. A whopping $5.6 million of that figure comes from share-based compensation, which is a way of paying executives with equity.  

While share-based compensation saves on cash, that money isn't free because it dilutes existing shareholders' claims on earnings. Plus, it's hard to justify Genius Brands paying its executives so handsomely while long-term investors face massive losses. The company's number of shares outstanding stands at 300 million as of Aug. 16 compared to just 79 million this time last year. 

Cheap for a reason 

Penny stocks are tempting because their dirt cheap prices and volatility offer the potential for quick multibagger returns. But Genius Brands is an example of why you should think twice before betting on these companies. The children's entertainment network boasts some compelling intellectual property, but it seems unable to create value for investors because so much of its money goes toward paying management. 

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Roku. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Genius Brands International Stock Quote
Genius Brands International
GNUS
$0.79 (0.11%) $0.00
Alphabet (A shares) Stock Quote
Alphabet (A shares)
GOOGL
$96.83 (-0.65%) $0.63
Amazon Stock Quote
Amazon
AMZN
$95.16 (1.87%) $1.75
Alphabet (C shares) Stock Quote
Alphabet (C shares)
GOOG
$97.26 (-0.35%) $0.34
Roku Stock Quote
Roku
ROKU
$56.31 (0.41%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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