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Grom Social Enterprises (NASDAQ:GROM) is a recently public social media company that caters to children under 13. It is also a provider of original entertainment content for children. The problem is that she has no chance of turning a profit, at least based on her current financial situation. This means that GROM stock is unlikely to be a winner over the next year.
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Because registration on Nasdaq in mid-June, the stock was volatile. First it spiked to $10.00 per share, then it dropped to $1.75 on September 28.
Since then, GROM’s stock has been in free fall. It peaked recently on October 6 at a close of $4.98 and on October 22 it closed at $4.56. This gives it a market capitalization of $55.73 million.
RECENT DEVELOPMENTS
In fact, this Boca Raton, Fla. company lost so much money it had to raise more capital after its Nasdaq IPO in mid-June. He lost $2.02 million in operating expenses on $1.388 million in revenue in the second quarter. Additionally, its sales were down 20% year over year.
In fact, Grom Social’s total net loss was $2.5 million for the quarter ending June and over the last six months its loss was $4.82 million. On a cash flow basis, its cash burn was $2.62 million in the six months ending June 30.
As of June 30, the company had $8.1 million in cash on its balance sheet. This was following its Nasdaq listing in June. However, since then the company has raised $4.4 million in a private placement of convertible notes. Corn October 21 this amount was increased to $10.4 million.
As it stands, Grom Social now has $18.5 million. But of course, that doesn’t include the amount the company likely burned in the last quarter. In fact, by the end of December, there’s likely to be only around $16 million left in the bank for Grom Social.
Where does that leave Grom Social
An analyst at Seeking Alpha argues that the only real source of income for Grom Social is its Filipino animation studio, Top Draw Animation. He makes animated films and television series.
Also, on August 19, Grom Social acquired an 80% stake in the Curiosity Ink Media kids and family content creator, using shares.
The 10-Q makes it clear that virtually all revenue comes from Grom Social’s animation products, not from its social media or ad revenue. For example, its revenue from social media and advertising came in at just $489 during the quarter.
Everything else came from its 2D animation series for $1.277 million and $111.5,000 came from web filtering services from its Grom Education Services unit.
As for the Curiosity Ink Media acquisition, the Seeking Alpha analyst doesn’t think the acquisition is “meaningful.” There is no information in the company’s press release about the actual amount of revenue it makes. For example, a recent press release talks about Curiosity’s move to a toy brand from animated series, but no dollar amounts are included.
Where does that leave investors in GROM shares
Right now with a market cap of $55 million, but after subtracting my estimate of his net cash of $16 million, the net market value is around $39 million.
Assuming the company doubles its half-year sales of $3.264 million, or $6.528 million, it’s not trading at an extremely rich valuation. $39 million divided by $6.5 million is 6 times the sales.
It’s not too expensive, assuming it becomes a growing business. But with sales down 20% year-on-year last quarter, the question of whether it’s a growth stock is clearly up in the air.
Therefore, the upcoming third and fourth quarter numbers will be important to see if the latest acquisition has taken the company to growth status. Otherwise, GROM shares are not worth buying for most investors.
As of the date of publication, Mark R. Hake did not hold (either directly or indirectly) any position in any of the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and execute the Guide to Total Return Value that you can see again here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
