Overview:
Funko is a pop culture lifestyle brand. They produce Funko Pop! figures, bags, wallets, board games, vinyl, and, recently, NFTs. They operate under the mission that everyone is a fan of “something”. They have the most amount of licenses (over 1000 licensed properties) that allow them to use their content (Disney, Marvel, HBO, etc..+250 others)
Their fan base could be seen as very dedicated and active fan base. According to their annual report, 33% of their fans are hardcore collectors that own an excessive amount of collectibles. The brand is well known among the collectibles community, and “Funko” term is used to describe any pop culture figure. They also grow their brand by attending Comic Cons and focusing on social media. They also operate in a niche that no other direct competitors are following (more on that below)
The company has recently been getting lots of negative remarks from fans and analysts after reporting a net loss in 2022 and admitting to their plan of getting rid of 30-36 million worth of inventory (Dumping). The fans are currently furious as to why the excess inventory is not being donated, and investors are not happy with the mismanagement. Management explained that their forecasted inventory was not accurate, their ERP system is faulty, and a new one will be established with more money used this year.
Company in numbers:
Even though the company reported one of its worst quarters yet, with negative profits due to an increase in production costs and inventory issues, its growth rates are still worth noting to understand the bigger picture:
Return on invested capital 6yr average (since IPO): 27%
Sales growth rate 6yr average: 24%
EPS growth rate 6yr average: 27%
Year to Year numbers: (From their annual letter)
Net sales increased by 28% to 1.3B
Net sales in the US increased by 30% to 900M
Net sales in Europe increased by 22%
Net sales in other (MENA, Asia, etc..) increased by 21%
Net sales from their other brand Loungefly increased by 67%
Top ten customers representing 44%.
No single customer accounted for over 10% of revenue
Direct to consumer's sales flat at 11%
These numbers show robust demand and a good return on acquisition since they bought Loungefly, a pop culture accessories brand. it also shows that their effort in Direct to Consumers sales is yet to be shown effective and needs further improvement.
Moat?
I would argue their brand is one of their moats, their fans are obsessed with their original production. They also found a niche that no other direct competitor is investigating, hence they are the largest portfolio of licensed content in the pop culture industry with over 1000 licenses, 106 trademarks in the US, and 247 trademarks International.
Future & Risks?
-While the growing demand and their ability to yet penetrate other international markets sound optimistic, the management in the last earning reports alarmed investors that their inventory and warehouse issues would be fully solved by end of this year. This is also one of the risks as what if the newly implemented ERP fails once again? What if the company needs to compensate for renting extra spaces? Will the management be competent enough to avoid such issues in the future?
-The seasonality of their products, even though they mention their products are not seasonal and have longer shelf time, their quarterly reports still show a stronger quarter towards the end of the year when buying gifts is on every consumer's mind.
-I see the demand for collectibles growing, and I find their mission of everyone being a fan of something quite promising as it is indeed true, and they are able to capitalize from it. Their future plans include more focus on Anime, Sports, and Music. Three areas they believe are underpenetrated.
They are also trying to diversify their offerings, allowing them to step further from being seasonal products and having multiple streams of revenue. Their recent acquisitions have also supported this thesis:
2017 Loungefly
2019 Forrest-Pruzan (leading board game development studio)
2021 TokenWave LLC (NFT project)
2022 Mondo Collectibles (a high-end collectible company that creates vinyl records, posters, soundtracks, toys, apparel, book, games, and other collectibles)
-The company is very short on cash, currently 19M, and could dilute shareholders to raise more capital in the future.
Stock:
Currently trading at 9,26$. The stock was punished last week after quarterly reports and was down 22% until recovering back to 9$ per share.
It also seems to me that it is one of the companies that is misunderstood by investors; it could be the next beanie baby or it could be another fad. However, numbers and the company's effort to diversify argue against it.
A large amount of institutional ownership 91.70%
Management is buying stocks but does not hold any significant shares.
Current Market Cap: 499M
Competitors:
Hasbro ($HAS) is an American conglomerate that produces toys, board games, action figures, etc…
Mattel ($MAT) is another toy company; think of Barbie & Hot Wheels.
It is worth noting that even tho both of these companies operate on a much higher level, they have yet to penetrate the same niche Funko is operating. As they focus more on kids rather than adults and pop culture.
The only direct competitor I was able to witness is a small private company called Youtooz, creating very similar figures to Funko with much fewer licensing agreements and focusing more on Youtubers and individual celebrities.
Happy to hear your thoughts, and let me know if I have missed something!
PS: This is not financial advice. Please do your DD yourself before.
PSS: I have an open long position in Funko
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