Funko (NASDAQ:FNKO) had a rough ride following its November initial public offering. FNKO IPO’d at $12-per-share and proceeded to sink to the $8 region in short order. Now, however, FNKO stock is on a tear after striking a couple key licensing deals. It seems Wall Street just doesn’t have a feel for the finer points of pop culture.
Back in December, I told my readers over at Banyan Hill that, “If you’ve got the stomach for a bit of risk, FNKO stock may never trade this low again.” The shares were trading near $8.30 at the time. FNKO is now north of $19 and climbing. That’s a 130% gain without even touching options.
And FNKO could be in for even more gains.
The company has the inside line on becoming the next Mattel (NASDAQ:MAT) or Hasbro (NASDAQ:HAS). For those unfamiliar with Funko, the company specializes in pop-culture themed figurines, toys and bobble heads. It has even branched out into plush products, accessories, apparel, accessories and homewares.
Looking for Deadpool throw pillows or keychains? Funko probably has you covered.
But the big reason FNKO stock soared last month was the signing of two licensing deals. First, Funko brought in The Pokemon Company International to produce vinyl collectibles of the iconic Pikachu — my daughter just had to have one!
Second, Funko inked a deal with Tencent Holdings’ (OTCMKTS:TCEHY) Epic Games to produce a range of toys and collectibles around the insanely popular multiplayer video game Fortnite.
After signing deals for two of the hottest pop culture properties last month, it’s no surprise why FNKO stock soared nearly 60% in July.
And now, Funko is headed into the earnings confessional again. The stock popped sharply higher following its last trip, and I would expect more upside this time around as well … especially where guidance is concerned.
Right now, Wall Street is expecting a profit of 2-cents-per-share on revenue of $122.53 million. Since Funko wasn’t a publicly traded company a year ago, there are no year-over-year comparisons. That’s why guidance is going to be key here, and that’s where the Pokemon and Fortnite deals come in. Look for strong guidance and a post-earnings pop from FNKO stock as a result.
Turning to sentiment, it seems Wall Street’s opinion of Funko has shifted sharply since the company’s IPO. According to Thomson/First Call, all eight analysts following the shares rate them a “buy” or better. However, the 12-month consensus price target could use some upward revisions, as it currently rests at $16.13 — a discount to FNKO’s current trading range.
Options traders are also heavily bullish on FNKO stock. Currently, the August put/call open interest ratio comes in at 0.23. In other words, calls more than quintuple puts heading into this Thursday’s report.
Overall, August FNKO options implied volatility is pricing in a potential post earnings move of about 16%. This places the upper bound near $22, while the lower bound lies near $16.
Before we get to my FNKO options trading ideas, it’s important to know that open interest is light on FNKO. This will affect volatility, options pricing and liquidity, making it potentially tough to get in at good prices if everyone decides to jump in at once.
Two Trades for FNKO Stock
Bull Call Spread: Traders looking to bet on a post-earnings Funko stock rally might want to consider an Aug $20/$25 bull call spread. At last check, this spread was offered at $1.50, or $150-per-pair-of-contracts. Breakeven lies at $21.50, while a maximum profit of $3.50, or $350-per-pair-of-contracts — a potential 133% return — is possible if FNKO stock closes at or above $25 when August options expire.
Put Sell: If you are looking for a more neutral-to-bullish strategy on FNKO options, then an Aug $15 put is a good starting place. At last check, this put was bid at 45 cents, or $45-per-contract.
As long as FNKO stock trades above $15 through expiration, traders pursuing this strategy will keep the $45 premium. However, if FNKO trades below $15 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $15-per-share, which could be a steal heading into the holiday shopping season.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.