Funko (FNKO)

Pop culture collectibles manufacturer Funko (NASDAQ:FNKO) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 11.6% year on year to $190.7 million. Its non-GAAP loss of $0.33 per share was 24.1% above analysts’ consensus estimates.

Company Overview

Boasting partnerships with media franchises like Marvel and One Piece, Funko (NASDAQ:FNKO) is a company specializing in creating and distributing licensed pop culture collectibles.

The toys and electronics industry presents both opportunities and challenges for investors. Established companies often enjoy strong brand recognition and customer loyalty while smaller players can carve out a niche if they develop a viral, hit new product. The downside, however, is that success can be short-lived because the industry is very competitive: the barriers to entry for developing a new toy are low, which can lead to pricing pressures and reduced profit margins, and the rapid pace of technological advancements necessitates continuous product updates, increasing research and development costs, and shortening product life cycles for electronics companies. Furthermore, these players must navigate various regulatory requirements, especially regarding product safety, which can pose operational challenges and potential legal risks.

offering products in the collectibles and licensed merchandise sector include(NASDAQ:MAT), Hasbro (NASDAQ:HAS), and JAKKS (NASDAQ:JAKK).

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Funko’s sales grew at a sluggish 6% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector and is a tough starting point for our analysis.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Funko’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 10% annually.

This quarter, Funko reported a rather uninspiring 11.6% year-on-year revenue decline to $190.7 million of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 6.2% over the next 12 months. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below the sector average.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Funko’s operating margin has risen over the last 12 months, but it still averaged negative 2.4% over the last two years. This is due to its large expense base and inefficient cost structure.

In Q1, Funko generated a negative 12.2% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Funko, its EPS declined by 14.9% annually over the last five years while its revenue grew by 6%. This tells us the company became less profitable on a per-share basis as it expanded.

In Q1, Funko reported EPS at negative $0.33, down from negative $0.18 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Funko’s full-year EPS of negative $0 will reach break even.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Funko has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.9%, lousy for a consumer discretionary business.

Funko burned through $28.81 million of cash in Q1, equivalent to a negative 15.1% margin. The company’s cash flow turned negative after being positive in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Funko historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.3%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Funko’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Funko reported $25.93 million of cash and $276.8 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $80.5 million of EBITDA over the last 12 months, we view Funko’s 3.1× net-debt-to-EBITDA ratio as safe. We also see its $10.42 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Funko blew past analysts’ EBITDA expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 5% to $4.40 immediately following the results.

Updated: May 16, 2025 at 10:50 PM EDT

Before making an investment decision, investors should account for Funko’s business fundamentals and valuation in addition to what happened in the latest quarter.

We cheer for all companies serving everyday consumers, but in the case of Funko, we’ll be cheering from the sidelines. To kick things off, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Funko’s P/E ratio based on the next 12 months is 20x. This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $6.25 on the company (compared to the current share price of $4.13).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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