Funko Will Have The Force In 2020

Dec. 10, 2019 4:29 PM ETFunko, Inc. (FNKO)DIS11 Comments7 Likes
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Summary

  • Funko is a manufacturer that primarily makes figurines that appeal to both children and adults.
  • Funko continues to grow its IP portfolio through relationships with entities including movie and game makers, as well as sports leagues.
  • Funko's strong relationships with key content makers and proven ability to rapidly get products to market are underappreciated by the market.
  • Funko is likely to have a strong holiday quarter because its toys make great stocking stuffers and secret Santa gifts, including being rightly priced.
  • Amazon indicates Funko's Baby Yoda doll is a very successful product.

Funko Inc. (NASDAQ:FNKO) is an American company that manufactures licensed pop culture collectibles. Funko is best known for its licensed vinyl figurines and bobbleheads, but the company also produces licensed plush toys, action figures and electronic items such as USB drives and headphones. Shares are currently trading near their lowest price of the year, and there are several reasons to believe this may be a good time to buy shares, and maybe reserve a Baby Yoda.

What makes Funko special

Funko is an underappreciated producer of collectible toys. Funko has established special relationships with content creators, and may be seen as the partner of choice for producing high quality collectibles. As a result, Funko appears capable of capitalizing on whoever or whatever happens to be popular next.

Funko has established itself as a competent maker of licensable memorabilia for gamers, movie fans, sports fans, and anime fans, among others. It is not just a brand itself, but also a canvas for existing brands to produce a Funko version.

(Source: Funko Q3 2019 investor presentation)

Funko pop culture

Funko has proven a sensible partner for making pop collectibles and has developed strong relationships with powerful brands. Those relationships are predicated upon Funko's ability to quickly produce high quality officially licensed products that can promptly address demand.

Funko products make decent stocking stuffers for children and adults. They do well for secret Santa gift clubs with low price limits. For example, MLBshop.com has 72 Funko items that come up for sale on its website as of this writing. The dominant Funko items are their Pop! Figurines, and the New York Yankees Aaron Judge Funko Pop! Figurine is listed as the most popular in collectibles. These things regularly sell for $9.99, but happen to be on sale at the moment for $7.49.

(Source: MLBshop.com Funko query)

MLBshop.com Funko itemsSome signed versions of these figurines sell for hundreds too, but that is a totally different market. Funko's core market is cheap and cute, whether in sports, gaming or entertainment. For example, Amazon's (AMZN) top choice for Funko Pop between $15 and $25 is this Game of Thrones two piece Daenerys and Dragon. This product is about three years old and it continues to be a top choice.

(Source: Amazon.com top choice for Funko Pop between $15 and $25)

Daenerys & DrogonIf you want to see some forward demand for these lumps of plastic, check this out. Funko has a Baby Yoda and it appears to be another major hit for 2020.

(Source: Amazon search for Funko Baby Yoda)

Funko Baby YodaThe product will not be available until May 15 of 2020. While it is inexplicable to not have it available on May the fourth, customers do not seem to mind. It is already a clear hit that needs to be recognized.

According to Amazon's page for Funko's standard size Pop! The Child figurine (where "The Child" is Baby Yoda's actual name), it is the #1 Best Seller within Amazon's Action Figures category. It is the best seller even though it is only on pre-order and will not be released for two quarters. Baby Yoda Most popular but not for sale

(Source: Amazon.com's Funko Pop! Baby Yoda (The Child) Figurine page)

This showing of strong demand for next year's product is exactly what an investor wants to see. Moreover, while Amazon is clearly a strong partner for Funko, as is Disney (DIS), it should be noted that Funko is not beholden to any single retailer. Funko's products are available at many traditional and online channels, including Funko's own direct and digital options. In 2018, no customer accounted for more than nine percent of Funko's sales.

(Source: Funko Q3 2019 investor presentation)

Funk distribution

How Funko grows

Funko's growth is fueled by maintaining strong relationships with premium content owners, and allowing their products to be available everywhere. Funko's emerging channels include differentiated locations for both specific interest in their products and also impulse purchasing.

Few people go to a Foot Locker to buy a Funko product, but some walk away with one. Funko found its way into Ulta by making #FunkoFabulous Disney Villains cosmetics.

(Source: Ulta website Funko brand page)

Ulta Funko

A search of Hot Topic's website for Funko yields 791 results, and I could not find any sporty ones among them although, so that is rather differentiated from the above-mentioned 72 items that MLPshop.com is selling. Funko is not just making products for every customer, but also something for every retailer.

In addition to growing distribution through adding retailers that sell new and differentiated product types, Funko also continues to grow its access to content. Funko's strong relationship with premium content has provided them growing access to a diverse portfolio of licenses.

(Source: Funko Q3 2019 investor presentation)

Funko IP accessMoreover, they can exist as a category itself of Funko versions of many things, rather than the exclusive type. Funko's competent curation of its own brand and the frequent try-party nature of many of its products have made it an apparent partner with Disney's deep bench of content, and sports as a general concept rather than to a particular player, team or league.

This has allowed Funko to quickly add licenses as new things are realized in any market. This works out well, because many Funko products continue to sell for years to come. For example, fact: This Dwight Schrute Pop! Figurine is on Amazon's Holiday Toy List. My theory: nobody is buying this for children. This is being bought for friends, partners and personal collections. It is also an example of how evergreen content continues to generate demand.

Dwight Shrute POp Figurine

(Source: Amazon Holiday Toy List: Dwight Schrute Pop! Figurine)

A mixed quarter for Funko provides opportunity here

In October, Funko reported what was received as a mixed quarter. Funko provided full year guidance for revenue to be in a range of $840-850 million and EPS of $1.15 to $1.22 per share. This sales and earnings guidance was below consensus estimates, and shares weakened.

Funko's recent weakness continued in November when Piper Jaffray cut its price target to $24 from $30 to adjust for the lowered estimates.

ChartData by YCharts

This took FNKO shares down to close to their 2019 lows, and also well below that $24 price target. While it may be the case that shares were a little expensive a few months ago, when it spiked into the high $20s, shares are now about $15.

If we presume FNKO's EPS will come in at the low end of its guidance, shares are currently trading at a price to earnings ratio of about 13. This is seemingly reasonable, and appears to represent a strong opportunity to speculate on this holiday season and 2020.

Moreover, it should be expected that their Baby Yoda models will be a highly successful and also a source of revenue that was relatively unexpected. As a result of this product, Funko will likely have a better than anticipated 2020 and require revised estimates from Wall Street analysts. As a result, I expect for some revenue and earnings estimate increases in early 2020.

Conclusion

I believe that it is likely Funko will beat its guidance for 2019 on a strong holiday quarter. Further, it appears likely that 2020 will be a good year due to the continued addition of products and retailers. It is likely full year EPS will be around $1.20 and that 2020 will be a good year.

I believe that a fair value for FNKO shares in advance of their reporting this holiday quarter is a P/E of 15, which would mean a per share price of somewhere between $17 and $18 based on the company's guidance. Moreover, it is likely the company will provide reasonably strong 2020 guidance when they report earnings for this quarter. For this reason, I intend to acquire FNKO shares on weakness and tax-loss selling between now and the end of the year.

This article was written by

Zvi Bar profile picture
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Zvi provides advisory services to companies, trusts, and individuals, including consulting expert services regarding retirement and estate planning. Zvi is admitted to practice law in the state of New York, where he offers cash management, Bitcoin, and Trust Protector services. Zvi is also The Claw of The Lava Empire and is an Amazon Influencer. No articles or discussions here shall constitute a legal, fiduciary or advisory role, but solely act as informative press and/or a starting point from which, ideally, further constructive discussion may follow. Comments are welcome, as are questions.
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Disclosure: I am/we are long VIR, DIS, AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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