Genius Group Limited (NYSE:GNS) has been on a ridiculously wild ride over the past few days. The stock has skyrocketed from around $0.50 to over $3.00 on news of a very aggressive pursuit of stock market manipulators and short sellers. Despite the fact that data providers show a negligible short position of less than 100,000 shares, GNS has stated that it received proof from lawyers of a “significant” amount of the company’s shares having been sold but not delivered, indicative of a market manipulation scheme. The company has created a Task Force led by former Deputy Director of the F.B.I. Timothy Murphy to investigate this allegedly illegal trading.
Thanks to this news release and corresponding spike in price and volume, GNS has now become the latest retail-driven meme or cult stock. I have no issue with the idea behind the meme stock and short squeeze movement, I just had a strong dislike for the individual stock choices that the retail crowd has been making within this movement. I think this time GNS is a good choice and I will explain why in this article.
GNS has 24.7 million shares outstanding and a 10.6 million float. Despite that, volume over Thursday and Friday combined for an eye-popping 500 million shares. That’s nearly 50 times the float churning over in two days. That level of volume indicates to me that something unusual is going on with this stock and the company is probably justified in opening an investigation. But recognizing that something unusual is going on is just the first step. In order for a short squeeze theory to be successful, there needs to be a competent management team that knows how to go about capturing the opportunity. This leads into my next point.
For a cult stock, you need a good leader. Genius has that in Roger James Hamilton
In my humble definition, a cult stock is a listing that has a dedicated base of investors who believe in a company so much that they will buy it up to a valuation well beyond what is considered fair value by other market participants. They are betting on enormous future success. A meme stock is a kind of cult stock where investors are buying it well beyond its fair value, but they might not even care about the company’s long-term future. They are in the stock for reasons beyond traditional investing, such as trying to create a short squeeze or invoke a change in the way the markets function.
The three most popular and/or infamous meme or cult stocks out there are Tesla, Inc. (TSLA), GameStop Corp. (GME), and AMC Entertainment Holdings, Inc. (AMC). Taking a look at a two-year chart tells you all you need to know about how the short squeezes are coming along, but they did have great short-term success back in 2021.
For a cult stock, you need a good leader. Someone who is willing to put themselves out there as the “face” of the company and interact with the retail investing crowd. Similar to how a movie star or athlete would engage with their fans on social media. Tesla has Elon Musk. GameStop has Ryan Cohen. AMC has Adam Aron. Genius has a surprisingly good leader, especially relative to its market cap in CEO and founder Roger James Hamilton. Hamilton owns 9.4 million GNS shares, or about 38% of outstanding stock. This stock also represents a significant portion of his personal net worth. So he would be quite motivated to see the stock price thrive and isn’t just in it for a paycheck.
Here’s a chart I put together of what I hope will be the most ridiculous valuation metric you will ever see in an article on Seeking Alpha. But in the meme stock world, it actually makes sense. Market cap per Twitter follower of the aforementioned leaders of these four stocks:
With an $80 million market cap as of Friday’s close at $3.24, Roger Hamilton and his 926,000 Twitter followers can be had for the bargain-basement price of only $86 per follower! This compares to the thousands of dollars per follower for the other three companies. A scroll through his Twitter feed shows that he is pushing the short squeeze narrative hard, conducting interviews with other company leaders fighting alleged short attacks on their stocks and tagging the #nakedshorts hashtag.
His YouTube channel also has 179,000 subscribers and high engagement, particularly on videos made over the last week. What all of this shows is that Roger James Hamilton has a significantly greater social media following and engagement than the leaders of other popular meme stocks, and the stock he leads has a significantly lower valuation. The potential for GNS to squeeze on high retail investor interest is actually much better than most other stocks because Hamilton knows how to reach these type of investors and rile them up for his cause. And the stock only has a 10.6 million float and a $3.24 share price.
While the activity on social media is nice and the float holds high potential for a squeeze, it will be all for naught if the company can’t get a handle on the next issue.
Dilution: The #1 killer of any short squeeze narrative
A major hurdle to any short squeeze or general increase in stock price will be dilution. One of the major reasons why the AMC short squeeze attempt failed so miserably was that the company significantly diluted its shares from 100 million to over 500 million in the span of two years. Shorts aggressively short a stock for good reason, with one of those reasons being expected future dilution from which the shorter can cover at much lower prices.
I don’t expect GNS to increase its share count five times in the next two years, but as a young company with negative operating cash flow and the need to fund growth, dilution remains a significant risk. The last 12 months of operations saw about an $8 million operating loss while the balance sheet as of September 30, 2022 shows $9 million in cash and $20 million in working capital. So the company has at least a year of runway if it can keep its burn rate at or below recent levels.
GNS announced a $7.5 million at-the-market capital raise, which is still subject to final due diligence. $7.5 million is only about 10% dilution at current prices, but companies getting into these types of financing deals are what attracts shorts to them in the first place. The shares in the ATM offering would be priced at an 8% discount to the lowest calculated VWAP for the pricing period, which gives every incentive for a firm to short the stock as much as possible during that period to ensure the lowest price possible for the shares received. The good news is that it doesn’t look like a binding agreement has been signed yet, as it is expected to be signed within 30 days from the January 9th announcement.
Fundamentals don’t support a higher price but they don’t preclude it either
Genius Group is an education technology company that offers a suite of education and related tools to entrepreneurs. The company has projected pro forma revenue to be between $35-$38 million for 2022 with an adjusted EBITDA loss of $4-$5 million. Typical revenue multiples for growth companies in the education space range between 2-4x. With an $80 million market cap as of Friday’s close, GNS is trading at about a 2.2x revenue multiple. I find that to be reasonable given the company’s smaller status and cash flow negative operations.
If the stock was to more than double on short squeeze speculation, a revenue multiple of over 4 would be stretching the valuation. But it isn’t completely unreasonable. Meme stocks are meant to be the opposite of value stocks, yet GNS is one that currently trades at a reasonable valuation, even after its massive run. An investor could view its fundamental value as a fail-safe in case the short squeeze thesis doesn’t pan out.
Conclusion: Don’t be enticed by bandwagon jumpers and other final thoughts
It didn’t take long for other struggling small-cap stocks to see how the stock price of GNS reacted to the announcement of the short seller investigation and jump on the bandwagon. Helbiz, Inc. (HLBZ) more than doubled at the opening bell on Friday after announcing an investigation of its own, before giving much of those gains back by the end of the day.
It’s commendable that a company wants to do what it can to recover funds for deeply underwater shareholders. However, HLBZ has one problem with trying to investigate into short sellers. Its financials are absolutely abysmal and have demonstrated no sign of improvement since going public. It averages about $4 million a quarter in revenue with over -100% gross margins and a burn rate of about $20 million a quarter. Its balance sheet as of September 2022 shows a little over in $3 million in cash with a working capital deficit of $34 million and $19 million in long-term debt. If there are shorts jumping over the moon to short HLBZ, it’s because they think the company is on a high-speed train to insolvency or heavy dilution.
A company like GNS with a reasonable burn rate and cash runway for at least a year has some levers it can pull to actually battle short sellers as I outlined above. A company like HLBZ does not. HLBZ has announced some cost-cutting and profitability-improving measures recently, but until these actions show a drastic and immediate improvement in financial performance, investors need to view these initiatives with a critical eye. When analyzing companies that will purport to fight illegal short selling on their stock, make sure they actually have the capacity to do something about it.
GNS is a highly volatile small-cap stock. I expect that volatility to continue. I have a relatively small long position that I consider to be a short-term speculative trade. However, events could change for the positive where I decide to hold on for a longer time frame or for the negative where I sell the entire position. Investors and traders are encouraged to make their own financial decisions. Though I recognize that some people will hold this stock for very different reasons than my own.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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