Trade Research – Funko ($FNKO)
- July 15th, 2018
- Write comment
Funko Inc ($FNKO)
Background
Funko is a pop culture consumer goods company serving the United States, China, Vietnam, and the United Kingdom. They create the very popular “Pop!” action figures with stylized, oversized heads, that have been extremely popular with collectors since debuting in 2008.
Funko IPO’s in November of 2017 at $5, opened at $7+, and ran up to $9.41 in quick order. A few weeks later, it dropped down to $6 and has been steadily growing up to $16 most recently.
Stats
Market Cap: $778M
ATR: 1.82
Short %: 4.03
Institutional Ownership: 78.81%
Avg. Daily Volume: 266K
Strengths
In addition to its licensing contracts with over a thousand entities ranging from the NFL, to the Marvel Universe, to Disney, to Pokemon, to WWE, Anime, and more, one of the key advantages Funko has is its speed to market for new products. Funko can bring a new product from concept through design and approval to production in as few as 70 days. This gives them a unique ability to capture and capitalize trends in pop culture. For example, when Game of Thrones unveiled a new character in its season finale, Funko was able to show HBO a printed and painted concept, get the go-ahead, and get the figures on the street in less than three months. Contrast this with giants like Hasbro or Mattel, which not only do not specialize in figures, but also usually take at least 12-18 months to get a new product to market.
In addition to the action figures, Funko produces whimsical pop gear such as tee shirts, purses, bags, pen toppers, and more. Their unique design look allows them to charge a premium for their items, yet they keep the price point of their action figures at under $10 for most. Their exclusive runs, such as the 10″ Thanos from Infinity War, were hugely popular at a higher price point.
Funko’s retail strength lies in its partnerships with big brick and mortar stores like Target and Walmart, where they are expanding their retail shelf space. Funko has developed a “pop store within a store” that leverages many of their properties in an expanding retail space. Years ago, they only had a three-foot end shelf at target, now they are positioned in five different areas of the store. In addition, Funko’s partnership with Target has produced “Funko Fridays”, and eight week exclusive sale that allowed Target customers to buy exclusive gear on consecutive Fridays. This resulted in a jump in Target’s site traffic of over 6500%.
Funko has created a platform, like Lego, that is not fad-dependent. They have a distinct style that is globally enjoyed. They are expanding their footprint in Europe. They had 59% growth in the Pop! figures last quarter, with 39% growth overall, and are guiding toward a high teens to low twenties growth rate for the year. The low volume indicates that this is a relatively unknown newcomer, perhaps having been forgotten by the street after its IPO.
Funko has also acquired an animation studio with the aim of creating content for social media and perhaps even following in Lego’s footsteps and ultimately creating feature films. While the feature film idea is pure speculation on my part, Funko has reported over 40 million views of its animated content last year. By the end of Q2 this year, they had over 50 million views, signaling a double in impressions for their video content.
Risks
Funko is a fast growing pop culture consumer products company. The stock has pulled back from its ATH and when I looked for possible reasons, I discovered that there are at least two pending class action lawsuits against them for misrepresenting their growth rate to investors in preparation for the IPO last November. I didn’t learn much more than that, and the market seems to either not know or not care about the lawsuits. I suspect, though do not know, that these types of filings may be commonplace when investors do not get the price they wanted or expected during the IPO. That said, this does cast a question over Funko’s reported earnings – at least prior to the IPO. From what I’ve learned listening to last quarter’s earnings call, the anticipated growth rate is strong. I am looking forward to the next earnings call, in a few weeks or so, to shed more light on what is going on as I’m sure the lawsuits will come up during the Q&A session after the report.
Summary
I like Funko products and I like their stock. I wish I had thought to look into them earlier, as I would have likely gotten in last year at a lower price point. That said, I like the prospects and will be initiating a small position soon, with the possibility of adding to it after reviewing their Q2 earnings call.
by Jack D. Schwager