Funko (NASDAQ:FNKO) correctly sized its business operations, inventory stock, and product lines in an effort to show better profits and net income. The company recently reported better financial performance compared to the last three quarters. It shows improvement, but it will take more time for significant improvements to occur. The current strategy with Bitty Pops and Pop Yourself may not be enough to change the metric.
Since the end COVER Funko, the company’s stock has fallen by 38.47%. The company has reported three quarters (Q4-2022, Q1-2023, Q2-2023) with a widening net loss and narrowing profit margins. With such a bearish trend and little hope for better financial results, I am changing my rating to a sell. When the company reports improved financial results and investor sentiment becomes more positive about the stock, then a buy signal will occur. I recommend that investors look at this company. Until business improves, it seems the company’s the stock price is currently overvalued.
Funko sells collectible vinyl figures featuring characters from movies, TV shows, comic books, video games, Japanese anime, and major sports. The 4” vinyl head figure (Funk Pop) is the most popular of the company’s product lines. These items are regular or exclusive runs and can be found at Target (TGT), Walmart (WMT), Hot Topic, Box Lunch, GameStop (GME), and other retailers. The largest selection can be found on the Funko website along with all of their product lines.
In addition to Funko Pop, the company produces other vinyl figures such as Funko Soda, Mystery Minis and Pocket Pops (keys). The company’s newest figure line is its Bitty Pops, which consists of 1” figures purchased in a four-pack. Funko attributed 5% of its Q3-2023 revenue to the sale of Bitty Pops. The company also continues its digital NFT releases which have redeemable physical displays. The company recently introduced Pop Yourself, where customers can make custom pops.
Funko owns the Mondo website where it sells special, limited edition 1/6 scale statues. These statues are limited edition and feature characters from comic books and other fan-based series. Items sell at a high price and quickly become hard to find.
In addition to toys and games, Funko sells licensed pop culture merchandise through its Loungefly brand. This brand carries backpacks, wallets, pins and other accessories. Loungefly can be found at the same retailers that carry Funko Pop, and Funko has a website dedicated to the brand.
The secondary market for Funko products remains strong. Over the past year, Funko has partnered with eBay (EBAY) and has designated eBay as the official secondary marketplace for Funko. Funko has its own eBay store and releases special limited edition items there. The company recently announced that its app, which tracks one’s Funko collection, will connect to eBay and allow collectors to see the last sold price of each piece from their collection.
Financial results of Q3-2023
Funko reported higher revenue compared to the previous two quarters, but lower revenue for the year. Revenues were ALL 312.9 million, representing a 14.41% year-on-year decrease and a 30.37% increase from the previous quarter. The company credits its higher revenue numbers to higher direct-to-consumer (e-commerce) sales, sales of its Bitty Pops, sales of its Pop Yourself and sales of its 1/6 scale figures on the site its Mondo website. The company also cites higher sales to wholesale customers in the US and Europe.
Wholesale channel revenue was $258.3 million and direct-to-consumer sales revenue was $54.7 million. Compared to Q2-2023, wholesale channel sales increased by 29%, while direct-to-consumer sales increased by 38%.
Funko said it experienced a 17% increase in direct-to-consumer sales versus an 11% year-over-year increase. The average order on the company’s Funko website increased 8% to $60 per order. The company’s website Mondo released a 1/6 scale Masters of the Universe battle cat figure. The figure sold for $500 each and the company reported that over 3,500 figures had been sold. The limited-time “Drop” represents one of the highest single revenue events for the company.
The company reported an adjusted net income of $1.7 million and an unadjusted net loss of $15 million. The net loss has decreased by 79.45% from the previous quarter. The company is evaluating appropriate sizing and other current downsizing strategies. The company’s net loss for Q3-2023 represents a 256% year-over-year increase.
The company’s margins improved compared to the previous three quarters and were roughly the same year over year. The Bitty Pop line doesn’t require new molds, so it’s cheaper to produce. The company also produced fewer of its Funko Pop figures overall. Funko reported an adjusted EBITDA of $25 million.
The chart below contains the last five earnings reports for Funko.
Price in millions of dollars
Cost of Revenue
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Cash & ST Investments
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Source: Looking for Alpha
The company reported total outstanding debt of $299.5 million. Inventory numbers are down 39% year over year and 13.45% from the previous quarter. Inventory reduction is a key part of right-sized company operations. The company’s profit versus expenses for Q3-2023 was essentially flat. The company has taken steps to reduce costs, but the result has not been enough.
Although the company expects higher holiday sales for the fourth quarter, Funko expects revenue numbers to decline for the next quarter. The company expects fourth-quarter 2023 revenue of between $260 million and $300 million. It forecasts an increase in gross margin and an adjusted net income of $2.8 million or diluted EPS of $0.05. It suggests an adjusted EBITDA of between $16 million and $26 million. Performance in terms of margins may increase as operating costs decrease, but overall the ratio will show a decline in performance.
Downtrend of stock price
The stock price is down nearly 50% from its 52-week high of $13.42. The stock price has lost 23% over the past 12 months, 37.40% YTD and 9.89% over the past month. The stock price has seen several days of gains, gaining 4.75% over the past week and 15.37% over the past three months. He is trading below his 20/50/200 daily moving average.
Between April 2023 and June 2023, the stock price was in an upward trend. It has since fallen to a new all-time low of $5.27 and has since regained several channels higher. It is currently moving sideways between $7.50 and $6.80. The price is finding resistance at $8.00.
The volatility of the major stock market is negatively affecting Funko’s stock price. Investor sentiment is not strong on the company’s performance, while there are greater uncertainties such as inflation and interest rates. The company is a retail stock and inflation is a concern of retailers. Funko said it has raised prices for Q3-2023 and that is one reason for the higher revenue. Better financial performance in the future should drive the stock price to higher levels.
NTM Total EV / Revenue
Total enterprise value (mm)
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The average of the street price target
The company’s stock price would appear to be undervalued. It trades below its street targets and has traded well above in the past. The company’s book value per share would mean that it is currently overvalued. If future financial performance is poor, while the market experiences more volatility, then the stock price is likely to fall more.
Funko cites its fan base as the main driver of its sales and value. The company points to its online sales and growing customer base as indicators of this successful strategy (of catering to fans). While demand for Funko exclusives has increased, demand at big box stores for regular Funko Pops may have decreased. It’s unclear whether revenue from the company’s fan base will be enough to match the top performance such as higher revenue or net income.
Risk and Investment Strategy
The company is at low liquidity risk, but has a moderate risk of poor financial performance in the future. There is a moderate downside risk to the company’s stock price before a new uptrend begins. There is great potential in the company’s long-term strategy. You should sell positions that have lost more than 20% and consider better entry points. I recommend that investors keep an eye on Funko’s stock price and future financial performance.
Funko reported better financial results for Q3-2023. The company has correctly sized its operations and inventory in order to show better profitability. The strategy has worked so far, but growth is slow. Funko has introduced several new products to its offerings and they have helped boost revenue numbers. The company continues to operate at a net loss, while profit and operating costs are at their lowest point. More volatility in the stock market has sent Funko’s stock price down, and it’s unclear what will bring it back. For now, I rate the company a sell and recommend investors keep an eye on its future performance.