When Funko Inc (NASDAQ:FNKO) pulled off its IPO back in early November, the reception was far from fun. It was actually downright hostile. Funko stock plunged a grueling 41% ]marking it as the worst first-day performance for an IPO in 17 years!
Now since then, there has been some improvement. Although, the return on Funko stock is still off about 31%.
No doubt, the IPO game can be volatile, especially for consumer-type companies. Just look at operators like Snap Inc (NYSE:SNAP) and Blue Apron Holdings Inc (NYSE:APRN).
OK then, what now for Funko stock? Might there be an opportunity to get an IPO at a nice discount? Well, to see, let’s first get a backgrounder on the company.
The roots of Funko go back to 1998, when Mike Becker began selling bobble heads from his home. Business was brisk as the internet boomed, but by 2005 he would sell the firm to Brian Mariotti. And yes, he didn’t waste time in taking the company to the next level.
A key part of the strategy was to aggressively sign up licensing deals, such as with marque brands like Walt Disney Co (NYSE:DIS), Time Warner Inc’s (NYSE:TWX) HBO and the National Football League. In all, Funko has amassed a portfolio of about 500 active properties.
According to the Funko S-1:
“Our business is built on the principle that almost everyone is a fan of something and the evolution of pop culture is leading to increasing opportunities for fan loyalty. We create whimsical, fun and unique products that enable fans to express their affinity for their favorite ‘something’—whether it is a movie, TV show, video game, musician or sports team.”
As for the growth, it has been robust, with sales up 28% during the latest quarter to $169.5 million and net income coming to $9.2 million. Funko has also built a strong infrastructure. Consider that it takes about 70 days to commercialize a product and the costs come to only $5,000 to $7,500 per SKU.
Issues With FNKO Stock
Funko stock still has some nagging problems. First of all, even though the company used a large part of its IPO proceeds to pare down debt, there is still a hefty $233.9 million on the balance sheet. In fact, the cash balance is only $7.7 million.
Next, the liquidation of Toys “R” Us has taken a toll. Note that about 3.4% of sales from Funko come from this retailer. It also seems like there will be continued problems with other retailers, which will weigh down on the company.
And finally, Funko must constantly deal with the issues of fads. Misjudging trends can easily result in worthless inventory and losses. Oh and something else: About 70% of overall sales come from the Pop! brand.
Bottom Line on Funko Stock
Despite all the issues, Funko has proven to be nimble. During the latest quarter, foreign sales soared by 109.6% to $47.2 million. Keep in mind that the company is still in the early stages of its global strategy.
The company has also been expanding beyond its collectibles business. The other categories include apparel, accessories, homewares and mobile apps.
More importantly, the market opportunity is enormous. According to the latest Funko Funko investment presentation, the spending on licensed merchandise is $152 billion in the US/Canada, $52 billion in Europe and $24 billion northern Asia.
Now the toy market is certainly in a funk when it comes to Wall Street, as seen with operators like Hasbro Inc (NYSE:HAS) and Mattel Inc (NYSE:MAT). But then again, this is often the time to look for a value play. And as for Funko stock, it does look attractive, with a cheap valuation — the forward price-to-earnings multiple is at 10X — and a fairly good growth profile.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
