Is Funko Stock A Buy?

Funko Stock Forecast: Have you been looking for a new investment? Many investors look towards the products they use every day and the trends they see happening in world-at-large, but what about pop culture as an investment?

Let’s look at pop culture merchandiser Funko (NASDAQ: FNKO) and explore that question in greater detail.

What Does Funko Do?

Funko is most well-known for its Pop! Vinyl collectibles. They are figurines that are roughly the size of a large fist that look like cartoon caricatures of pop culture icons.

They have oversized heads and stand less than 4” tall. From the Golden Girls to Star Wars, Batman to Disney, the company has a portfolio of licensed characters that add up to more than 11,000. If that sounds like a lot, it is.

“There’s something [in the catalog] that’s going to get somebody hooked. Whether it’s the X-Men or Breaking Bad — or heck, Huckleberry Hound — we’re going to find some pop culture phenomenon that’s going to get you into the hobby. And then we’re going to keep you coming back,” says Funko owner Brian Mariotti in a 2014 Rolling Stone interview.

As for the sheer number of character licenses the company owns, Mariotti explains, “When licensors see that your products are getting into the marketplace and there is a coolness factor to them, they want to be a part of that.”

Most notably though, the toys have a 442% average profit margin. Further, it takes as little as 70 days and as little as $5,000 to develop a figurine from conception to market, including molds.

The figurines are popular. In 2013, Funko brought in $40 million in revenue, and $28 million was from its signature figurines.

In 2017, the Pop! Division brought in 70% of Funko’s $516 million in net sales. Plus, people really like them.

On January 24, 2019, Diamond Comic Distributors named Funko’s Pop! line of figurines the 2018 Toy Line of the Year, making it the fifth year in a row that the line has received this recognition.

However, Funko is not a one-trick pony. The company is well-diversified. It also makes apparel, plush toys and a few other products like homewares and digital content.

According to a November 2018 Investor Presentation, no single property made up more than 8% of the company’s 2017 revenue.

Is Funko a Good Buy?

Funko has been in a wide 52-week range of $6.91 to $31.12.

At this point, the company may not see the astronomical growth it has experienced in previous years – it is already down $14 from its 52-week high – but that doesn’t mean the company won’t produce a solid return. Consensus estimates put the one-year target at $20.14.

That’s an upside of 18%.

Funko could get there if everything goes right, but there are several factors that could hinder its progress.

What are the Risks of Buying Funko?

Pop culture stocks have major appeal because they can grow like wildfire.

In just four years, Funko went from $40 million in revenue in 2014 to $516 million in 2017.

However, there are some significant risk factors that could send the share price reeling.

License Agreements

For one, pop culture merchandisers depend on license agreements, and they are not permanent.

Most only last two or three years until they are renegotiated or terminated.

In the case of Funko, 72% of its 2017 sales were from its top ten licensors.

Three of them – Marvel, Disney (NYSE: DIS), and LucasFilm accounted for 33% of the sales last year.

While there are separate entities, they are owned by the same people. If those individuals decided to manufacture their own figurines and revoke their licenses with Funko, the company would suffer a catastrophic loss.

Similarly, Funko is responsible for handling the brand image of its licensed characters. If a licensor were ever to think that Funko damaged its brand, there would be penalties and possibly a loss of licenses from that licensor and others.
Pop Culture

Also, pop culture merchandisers like Funko have to remain popular.

Customer tastes evolve and change, sometimes drastically. What is “in” this year could be out tomorrow.

While Funko is working to become more diversified, much of the company’s brand identity is tied to its Pop! Line and the distinctive silhouette those characters have.

If consumer tastes change, or a new character becomes popular for which Funko is unable to obtain a license, the company could also take a hit.

Changing Retail Environment

Then, there is the nature of the business.

Funko relies on brick-and-mortar stores to showcase its products.

Declining in-store traffic means less exposure and fewer sales.

GameStop [NYSE: GME] was responsible for 12% of Funko sales in 2015 and 2016, but that percentage dipped to just 8% in 2017.

There is also the issue of store closings. For example, Toys-R-Us had accounted for 3.4% of Funko’s sales in 2017.

Once the toy store chain closed, some of those sales will be recouped from customers going to other locations, but some are lost.

In addition, those brick-and-mortar stores could decide to feature other products, competing products, more prominently. If that were to happen, Funko could also lose traction.

Consumer Behavior

Consumer behavior makes a difference too.

Aside from the issue of people not spending money because of a poor economy, there is the impact of how things work in a media-driven world.

For instance, movies are not staying in the theaters as long as they did in earlier years, and that’s a problem for a company who sells products tied to movie releases. Short theatrical durations often mean a shorter time that the related figurine is relevant, and a shorter sales cycle reduces the amount the company can sell.

For instance, 21% of Funko’s 2017 revenue came from licensed movie characters – down from 24% in 2016.

Funko could face similar issues as consumers become less devoted to single franchises.

Funko Stock Forecast: The Bottom Line

There are many good reasons to buy Funko – and just as many reasons to worry about what comes next for this pop culture merchandiser.

As an investor, you should carefully evaluate your appetite for risk and examine how Funko could fit into your investment portfolio before you ante up.

For some investors, Funko is worth the risk, but it is not a good fit for everyone.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.