For most investors who own shares of Genius Brands International (GNUS -3.70%), holding the stock has been a punishing experience. It's down 36% year to date to just $0.70 a share -- making it a penny stock. Unfortunately, the company's underperformance doesn't look set to change despite a recent licensing deal with Walt Disney's Marvel Studios.
An impressive library of intellectual property
Genius Brands is a children's entertainment company. Its flagship streaming service, Kartoon Channel, is available via Roku, Apple TV, and numerous other digital television platforms. It features original content, such as the preschool shows Llama Llama and Rainbow Rangers (two seasons of which are also available on Netflix). But investors should pay closer attention to its acquisitions.
In 2020, the company struck a joint venture with POW! Entertainment to acquire the Stan Lee (creator of Marvel Comics) name and post-Marvel intellectual property (IP). This deal gave Genius Brands access to over 100 Stan Lee original creations not included in Marvel Entertainment -- which was acquired by Walt Disney for $4 billion in 2009. Now, Disney is circling back for some of this potentially lucrative material.
Disney (via Marvel Studios) has signed a 20-year deal with Genius Brands to license Stan Lee's name and likeness for future films, TV productions, or amusement parks and experiences. But while this can be viewed as a vote of confidence in Genius Brands' acquired IP, the company hasn't provided sufficient color on the deal's revenue implications. The deal also has a disappointingly limited scope -- Disney was only interested in Stan Lee, not the portfolio of IP he created after he left Marvel Comics.
Management has consistently failed to execute
These details matter because Genius Brands needs all the help it can get. The company has consistently failed to turn impressive-sounding headlines into sustainable value for investors. And the first-quarter earnings report it delivered last week only highlighted its ongoing, uninspiring performance.
Revenue did jump by 35% year over year to $1.4 million as the company expanded international viewership of Kartoon Channel and launched Stan Lee's Superhero Kindergarten in China. But that progress was essentially canceled out by a 46% surge in total operating expenses to $11.4 million, leading to an operating loss of $9.9 million -- seven times more than sales.
A whopping 96% of Genius Brands' operating outflows are classified as "general and administrative." And the lion's share of the first-quarter surge in expenses was due to a $1.9 million increase in share-based compensation and $1.2 million more being spent on a combination of higher pay and increased outlays for directors and officers insurance. Investors pay the price for management's largesse in equity dilution. As of the end of Q1, Genius Brands' shares outstanding had increased by roughly 6% year over year to 304 million.
Avoid Genius Brands
Despite its library of promising intellectual property and its high-profile licensing deal with Walt Disney, Genius Brands' stock still looks to be a bad bet. Management's compensation seems disproportionate to actual business performance, and the result is an operation that burns cash and dilutes shareholders. Don't be left holding the bag.