Grom Social Enterprises (NASDAQ:GROM) is a recently public social media company that is geared to kids under 13. It is also an original content provider of entertainment for kids. The problem is it has no chance of originating profits, at least based on its present financial situation. That means GROM stock is not likely to be a winner over the next year.
Since listing on Nasdaq in mid-June, the stock has been volatile. First, it shot up to $10.00 per share, and later it drifted down to $1.75 as of Sept. 28.
Since then GROM stock has been on a tear. It peaked recently on Oct. 6 at a close of $4.98 and by Oct. 22 it closed at $4.56. This gives it a market capitalization of $55.73 million.
In fact, this Boca Raton, Florida company lost so much money it had to raise more capital after it was listed on Nasdaq in mid-June. It lost $2.02 million in operating expenses on $1.388 million in revenue in Q2. Moreover, 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 in the last six months, its loss was $4.82 million. On a cash flow basis, its cash burn was $2.62 million during the six months ending June 30.
As of June 30, the company had $8.1 million in cash on its balance sheet. This was as a result of its June Nasdaq listing. However, since then the company raised $4.4 million in a private placement of convertible notes. But on Oct. 21 that amount was upped to $10.4 million.
So as it stands, Grom Social now has $18.5 million. But of course, that is not including the amount that the company has likely burned through this past quarter. In fact, by the end of December, it is likely that there will be just $16 million or so left in the bank for Grom Social.
Where This Leaves Grom Social
One analyst at Seeking Alpha argues that the only real source of revenue for Grom Social is its Filipino animation studio, Top Draw Animation. It makes animated films and televisions series.
In addition, on Aug. 19, Grom Social acquired an 80% stake in kids’ and family content creator Curiosity Ink Media, using shares.
The 10-Q makes it clear that virtually all the revenue comes from Grom Social’s animation products, not its social media or advertising revenue. For example, its social media and ad revenue amounted to just $489 during the quarter.
All the rest was from its 2D animation series for $1.277 million and $111.5K came from web filtering services from its Grom Education Services unit.
As for the acquisition of Curiosity Ink Media, the Seeking Alpha analyst does not believe that the acquisition is “significant.” There is no information in the company’s press release on how much revenue it actually makes. For example, a recent press release talks about Curiosity’s move into toy branding from animation series, but no dollar value amounts are included.
Where This Leaves Investors in GROM Stock
Right now with a $55 million market cap, but after subtracting my estimate of its net cash of $16 million, the net market value is about $39 million.
Assuming the company makes twice its half-year sales of $3.264 million, or $6.528 million, it does not trade at a super-rich valuation. $39 million divided by $6.5 million is 6 times sales.
That is not too expensive, assuming it becomes a growth company. But with sales down 20% YoY in the last quarter the issue of it being a growth stock is clearly up in the air.
Therefore, the upcoming Q3 and Q4 numbers will be important to see whether the latest acquisition has led the company to growth status. Otherwise, GROM stock is not worth buying for most investors.
On 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 writer, subject to the InvestorPlace.com Publishing Guidelines.