Funko Pops: Stock Rises As Analysts Initiate Coverage

Funko Inc FNKO's IPO debut is considered to be one of the worst one-day performances in 17 years. Here's what some of Wall Street's top analysts are saying about the stock.

Bank Of America: Impressive Growth

Bank of America's Rafe Jadrosich initiated coverage of Funko's stock with a Buy rating and $12 price target.

Funko grew from $10 million in sales in 1998 to a projected $492 million in 2017, Jadrosich said. The company has also established itself as a key partner for retailers and movie studios and has agreements with all major studios, the analyst said. 

Funko has a clear path toward achieving a double-digit top-line growth over the coming years for the following reasons, the analyst said:

• Content growth from studios.
• A modest distribution expansion in the U.S. coupled with a significant international expansion.
• Expansion into apparel and accessories.

Goldman Sachs: Levered To Growth

Goldman Sachs' Michael Ng initiated coverage of Funko's stock with a Buy rating and $16 price target.

Funko's growth profile is directly tied to the growth in TV, film and video game consumption, Ng said in a Monday note. Sales of toys based on TV and film characters have grown at a rate that is twice as fast as non-licensed toys and are expected to continue gaining market share in the overall toy category, the analyst said. 

Funko's business model typically focuses on non-exclusive novelty licenses, which limits any downside from minimum guarantees and reduces the risk of license loss, the analyst said. 

Funko's stock is trading at 4.7x the analyst's 2019 EV/EVBITDA estimate, a notable discount compared to its toy peers at 11.4x. Funko happens to be growing faster than its toy peers, but at the same time its EBITDA-to-free cash flow conversion is lower than its peers, Ng said. Its revenue concentration in Pop! (64 percent in 2016) is "somewhat concerning," the analyst said. 

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Jefferies: Niche Market Leader

Jefferies' Stephanie Wissink initiated coverage of Funko's stock with a Buy rating and $13 price target.

Funko is well-positioned to capitalize on the pop culture marketplace, which is growing at a 5 percent-plus rate versus the overall consumer packaged goods and toy market at 1 to 2 percent, Wissink said in an initiation note. The company's portfolio of content-backed brands could grow at a high-single digit rate, which implies it can outgrow the overall category for at least the next five years, Wissink said. 

Funko's business is also agnostic to demographics, income, age and gender, given the company's licensing rights to more than 1,000 properties, the analyst said. Funko benefits from having a low concentration risk, as no single property represents more than 10 percent of sales, and build-out costs are very low at around $6,000 per mold, according to Jefferies. 

BMO: Some Concerns Ahead

BMO Capital Markets' Gerrick Johnson initiated coverage of Funko's stock with an Outperform rating and $10 price target.

The collectibles toy market has transformed over the years from "nerd niche to mass market," as evidence by the growing number of retailers opting to sell collectibles, Johnson said in an initiation note. Investors should have a high degree of confidence in Funko's ability to generate near-term growth, but there are risks over the longer term due to the potential for product fatigue and oversaturation, Johnson said. 

Funko began addressing the analyst's concerns through various acquisitions and by obtaining a master toy license for niche intellectual properties, he said. Nevertheless, valuing the stock poses "unique challenges," as the company is a "small-cap stock with a hit-driven product line and no real brands or intellectual property."

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