Funko (FNKO) is up about 130 percent this year alone. Though Funko and the stock market as a whole fared well to start 2018, it has been quite the bumpy ride to finish up the year. Do not let Funko’s recent dip following its meteoric rise scare you away. The company’s fundamentals are solid. Plenty of licensing deals are coming down the pipeline. Let’s take a closer look at why Funko is on the upswing.
Funko is all about helping customers have fun. The company is widely known for its incredibly popular line of vinyl Pop dolls. Funko’s dolls are designed to look similar to pop culture characters that appeal to young boys and girls as well as some adults. The company was privately held until its November ’17 initial public offering. Funko was first priced at $12 per hare. Unfortunately, shares traded at a mere $6.50 by the year’s end. Though Funko’s stock didn’t fare so well after first hitting the market, it bounced back quite nicely this year.
Put aside the fact that Funko dipped with the recent market correction, and you will find this company has plenty of momentum. Funko’s sales are robust. Earnings growth is strong. The company’s latest licensing deals have the potential to double its valuation on a year-to-date basis.
So, do not assume you missed the Funko flight. Consider the recent dip as a possible buying opportunity. The company continues to sign deals with entertainment companies of varying sorts to create more of its uber-popular dolls and other merchandise. As an example, Funko has contracts in place to provide toys based on Fortnite and Pokemon. These are two of the most popular video games on the market. The typical game player has a bit of a collector’s streak, making it quite likely that Funko will make a bundle of money on its latest deals. Look for similar deals to be announced in the months and years to come.
Funko is in perfect position to benefit from the popularity of pop culture properties. This is quite the ironic statement to make as the company makes dolls as opposed to the content that makes the doll personas popular in the first place.
Funko’s second quarter sales boomed 32 percent on a year-over-year basis, hitting $139 million in the second quarter. Net income increased about 120% from the year prior, hitting $3.5 million. The numbers changed a bit in the following quarter. Sales declined a bit to a 24 percent increase on a year-over-year basis. However, third quarter sales are up to $176 million. Adjusted earnings per share leveled off at 27 cents yet this figure is 5 cents beyond the typical analyst’s target. All in all, Funko’s net income for the most recent quarter dropped 2 percent compared to the same quarter in the year prior.
Funko’s leaders insist the company’s year-end sales will total to about $650 million, which is much more than the original expectation of $620 million. If Funko follows through on its sales guidance, the company will enjoy more than 25 percent sales growth for one year alone. This is one of the many reasons why Funko management hiked its yearly adjusted earnings target to an adjusted earnings per share of 73 cents. The prior target was 65 cents. All in all, Funko executives’ new target represents more than 90 percent growth on a year-over-year basis.
Funko dolls are insanely popular. Though there is a chance Funko’s creations will prove to be a passing fad, the same has been said of countless toys and other businesses that haven proven quite profitable across posterity. Analysts anticipate Funko’s business to thrive in the short and near term yet few are willing to recommend a buy and hold strategy. The entertainment industry will certainly continue to grow, yet there is no guarantee Funko will capture a meaningful percentage. One thing is for sure: Funko’s merchandise will fly off the shelves in the months and likely even the couple years ahead. However, the company’s entertainment-themed figures represented more than three-quarters of its sales in the prior quarter. It is sensible to question whether Funko will be able to diversify its business, tap into numerous channels and build a lasting brand.
Consider a position in Funko if you are willing to monitor the stock fairly closely in the months and years to come. If Funko dolls appear to be losing momentum or if company leaders cannot forge new relationships with entertainment providers, you might not know about it unless you actively follow the stock. If you buy Funko, keep a close eye on the stock and do not hesitate to sell if it appears the company’s dolls are fading in popularity.