What happened

Shares of Genius Brands (GNUS -25.00%) were sliding this week as blowout top-line growth in its second-quarter earnings report wasn't enough to convince investors of the entertainment stock's long-term potential.

According to data from S&P Global Market Intelligence, the stock was down 14.7% as of 2:45 p.m. ET.

So what

Genius Brands, a small-cap entertainment company that owns a range of intellectual property in children's entertainment, delivered huge growth in its second-quarter earnings report.

Revenue was up 843% to $22.1 million, driven by its recent acquisition of Wow!, Ameba, and a strategic investment in YFE. The acquisition of Wow!, which reported $64 million in revenue last year, was the primary reason for the surge in revenue. The deal made Genius Brands the production company for CocoMelon, the No. 1 children's series in the world, as well as Barbie's Dreamhouse, and Madagascar: A Little Wild. 

Genius Brands initially jumped on the earnings report, but then faded over the course of the session, though it wasn't clear why. Despite the strong revenue growth, the report highlighted a number of weaknesses in the stock, including wide losses, cash burn, and share dilution.

The company reported an operating loss of $8.6 million in the quarter, and a free cash flow loss of $20.1 million through the first half of the year.

It also spent $53 million on the Wow! acquisition, $37 million of which was in cash. The company has over $100 million in cash and equivalents on its balance sheet, but that money is also securing a $61 million margin loan that could be called if it spends down its marketable securities.

Now what

Genius Brands initially spiked early in the pandemic on big promises from CEO Andy Heyward to become a major player in children's entertainment. Those have yet to materialize, despite partnerships with stars like Arnold Schwarzenegger and Shaquille O'Neal. 

For investors encouraged by the strong revenue growth, it's worth remembering that Wow! only sold to Genius for $53 million, and it's driving most of Genius's revenue. Based on that price, there's still a good argument that the Genius stock is overvalued at a market cap of $262.6 million.