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Funko: Bullish on Q1-2022 Results and eBay Investment

Funko (FNKO) reported impressive financial results for Q1-2022 and FY2021. The company's stock price rallied recently from news of an investment in Funko by The Chernin Group and a consortium of investors, including eBay (EBAY). Funko's financial success stems from its large fanbase of buyers/collectors as well as its massive catalog of pop culture licenses, covering all the hottest media releases.

Although greater market volatility is bringing down the price of Funko stock, I rate the company as bullish in the long term. The company's popularity shows that collectibles are big money and offer huge opportunities for investment, even on secondary markets.

Q1-2022 Financial Performance and 2022 outlook

The company reported quarterly net sales of $308.3 million, an increase of 63% year-over-year. There was continued and strong demand for Funko collectibles. Sales grew across all geographies and brands. The company has increased its brand offerings and distribution partnerships.

Funko Pop! and related brands are sold at Target (TGT), Walmart (WMT), Hot Topic, Box Lunch, Amazon (AMZN), GameStop (GME), Walgreens (WBA), and other specialty stores. Funko makes exclusive and limited edition Pops for these companies, which become very sought after by collectors. Funko also sells its diverse brands from its own e-commerce site.

The company's most popular product is the Funko Pop!, a vinyl figure bobblehead. An arsenal of pop-culture licensing supplies the styles and releases, all based on the hottest music, sports, and movie releases. Funko works with franchises such as Star Wars, Disney (DIS), Marvel, and DC Comics.

It releases merchandise ranging from the topics of video games, television shows, movies, major sports, and more. They are items to please almost any customer, from mainstream culture to subculture.

Other licensed products include keychains, enamel pins, and mini-figures. The company sells licensed accessories and backpacks through its brand Loungefly. Funko also has entered the digital NFT world with a unique launch per month of licensed digital trading cards. To date, every digital release has sold out within 30 minutes of the release.

The diverse brand offerings and extreme fandom on the side of the customers have driven sales growth. U.S. sales increased 70.1% year-over-year to $232.2 million, Europe sales increased 43.5% to $57.1 million, and International sales grew 48.3% to $19.1 million. Meanwhile, Funko Pop! merchandise grew 42.8%.

Driving growth includes its emerging brands: Soda, Vinyl Gold, and Popsies. Funko Soda is mock soda cans containing vinyl figures; Vinyl Gold comprises vinyl figures of rock and sports legends; Popsies are hallmark-like greeting cards made up of vinyl figures.

Loungefly net sales rose 103.5% year-over-year to $50.1 million. Even more impressive, sales from digital releases and games increased 140% year-over-year to $18.6 million. Direct-to-consumer (DTC) sales via e-commerce grew 36% year-over-year. Digital Pop! NFT has been driving growth during the last year and this quarter.

FNKO's gross margin is down to 35.3% compared to 41.4% last year because of an increase in the cost of freight expenses due to inflation. The company forecasts lower margins over the next quarter due to inflation and freight.

FKNO estimates full-year revenue for 2022 to be between $1.275 - $1.325 billion, up 24%-29% year-over-year compared to $1.03 billion. The market consensus revenue estimate for Q2-2022 is around $292 million.

The company showed an overall profit for Q1-2022, with net income totaling $14.5 million, representing a 31% increase. The company showed cash and short-term capital for Q1-2022 of $133.1 million, and its total debt is $168.9 million.

The company credits its licensed content and fanbase for the continued increase in sales. The company's licenses cover a large amount of popular culture from the past and present. The company also releases licensed merchandise for upcoming releases.

It describes its merchandise as high-quality, obsession-worthy content. For many of its customers, buying Funko's is a pastime. 36% of its customers are considered collectors, 33% are enthusiasts, and 31% are occasional buyers.

Recent Investment from The Chernin Group and eBay Commercial Agreement

The Chernin Group, along with a consortium of investors, recently acquired 12.5 million shares of Funko, amounting to a 25% stake in the company and two board seats. Included among the consortium is eBay, which has entered into a commercial partnership agreement with Funko.

eBay will become the preferred secondary marketplace for Funko, and Funko will make exclusive limited-edition Funko Pops for eBay. Funko's stock price rallied as investors digested the news of the investment last week.

Stock Price Volatility

Funko's stock price has dropped 18% over the last 12-months, but it is up 7.4% year-to-date and 11.8% over the past three months. It is currently trading above its 20-, 50-, and 200-day moving averages. The stock price rallied over 17% when the news was released about the Chernin investment and eBay agreement.

The stock price has suffered under recent market volatility. In March, it was down near $15.50 per share, and May volatility brought it down to about $16 per share. It is currently trading around $20.30 and has seen recent highs above $22 per share. Trading momentum remains high for the stock.

Wall Street's Take

Turning to Wall Street, Funko currently has a Moderate Buy consensus rating based on four Buys and three Hold ratings assigned in the past three months. The average Funko price target of $29.71 represents 46.5% upside potential.

Conclusion

Funko remains successful with its strategy of selling collectible vinyl figures and other pop-culture merchandise. The company continues to increase its quarterly and yearly sales numbers and maintains a position of net income.

The company has increased its distribution partnerships and its large collection of pop culture licenses. There is more to come from Funko's diverse array of collectibles. I rate the company as bullish for the long term. 

Read full Disclaimer & Disclosure

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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