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Is Funko a Fad or Here to Stay?

Motley Fool Staff, The Motley Fool

Funko (NASDAQ: FNKO) has been growing its business steadily through sales of its Pop figurines. The company has a deep roster of licenses, but its success depends on how the collectibles market develops and whether its figures remain popular. About 80% of its business comes from sales of the Pop figurines, and that's both a strength and a looming potential weakness. Can the company continue to grow, or is it Pogs 2.0 or the Beanie Baby craze? Savvy collectors Jim Gillies and Dan Kline voice some skepticism.

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This video was recorded on May 21, 2019.

Nick Sciple: Jim, you mentioned how collectibles are becoming really hot and a bigger and bigger part of what people are consuming. That ties in right to the company we're talking [about] on the back half of the show, and that is Funko, FNKO. I think both of y'all are collectors when it comes to these sorts of things. Before we dive into this company, do y'all own any Funko Pop figurines or any of those sorts of things in your own personal collections?

Jim Gillies: I'm staring at one right now.

Dan Kline: I don't, only because when we moved from Connecticut to Florida, I downsized dramatically. Everything I bring home, I have to throw something out. Or else, yes, I absolutely would have some Star Wars Funkos.

Sciple: Funko was founded in 1998, went through several rounds of ownership. The founder sold it in 2005. It's bounced around through a few private equity holders, but it IPO'ed in 2017. Fell more than 40% on its first day of trading, was the worst-performing IPO since the year 2000 when it came onto the market in November 2017. Closed at around $7 on that day, but has since tripled, and today trades around $21, which goes to show, we hear about Uber and all these other IPOs. Now, I have my own skepticism around these companies. But just how you perform on your first day of trading does not necessarily mean where the stock will end up long-term.

To give an intro into Funko if folks aren't familiar with it, 81% of their revenue comes from Funko Pop figurines. They're little bobblehead toys stylized with a bunch of different licensed characters that they use to sell their products. They call themselves a leading pop-culture consumer product company, that they are an index fund of pop culture. They have over 672 active properties sold in 2018 -- talking about Star Wars, Harry Potter, NFL, video games.

It's interesting when you look at this company's story. They sell themselves at this index fund of lots of different brands, but at the same time, it's a one-product company where 81% of revenue is coming from this one product. When y'all look at this as an analyst, what are your thoughts?

Kline: Let me give you a little context here. This is a product that costs between $7 and $25 depending on the exclusivity, a little bit of the workmanship, that you can't play with, that you don't need. This is Pogs 2.0. These are Beanie Babies with Star Wars faces. It is a fad that will pass, and at some point, kids won't think these are cool. I'm not saying it goes to zero, because 45-year-old men may still think they're cool. Again, we're pretty good at that. [laughs] And there might still be a market for the Star Wars and the Game of Thrones and some of those licenses. I see zero way this is a pop-culture phenomenon on the level it is -- it may still grow, but it's going to burn out. There is a long history of fads like this burning out. This isn't Hot Wheels cars.

Sciple: I remember, when I was growing up -- I'm a child of the 90s -- I remember the Beanie Baby explosion, when all those sorts of things were happening. You can definitely see the comparisons there to Funko. However, it was interesting to me how, you think of a company like this, that pushes out a lot of different exclusives or different variations of products, that long-standing brands -- brands like Harry Potter and Star Wars -- make up almost half of their revenue. They're less driven by these cyclical pops of "Avengers is in the news this year," and that drives a lot of sales. That was interesting to me.

Another interesting thing to me was their retailer breakdown. We talked about GameStop on the front half of the show. GameStop is their largest retail customer, a 9% customer. Also, one of their largest customers is Hot Topic. We just spent the first half of this show ragging on GameStop and legacy mall retailers, their prospects going forward. When you see that a meaningful -- at least, if you combine GameStop and Hot Topic together -- a meaningful part of their business is from those companies, does sales slowing over time concern you when you look at this company? Obviously, you compared it to Beanie Babies, but when you layer that on top of their retail strategy, what are your thoughts there?

Kline: I'll let Jim go first, because I talked on the last one.

Gillies: First of all, I don't know if you've got the camera on, but I'm going to hold up my little Funko here of Boba Fett. I live in a collector house. Dan says 45-year-old men still think these are cool. I will disclaim that it's not the man in this house who's the main collector. My partner is a rabid collector of a bunch of things. I think she's trying to keep GameStop in business. But, we're on Funko here.

Because I go to the ComicCons, people are rabid for these things, and I'm not sure why. But I can tell you, there are several dozen of those in this house alone, because people do love them. And some of them, yeah, I think Dan said they're $7 to $25, I wish some of them were $25. If you get a rare enough one, you're paying more. And people seem to love them. Maybe people loved Pogs. I don't really remember the Pog craze. I certainly don't hear from Pog much anymore.

I said earlier privately between us, today is the first day I've known that they are public. I had no idea these guys were public. I look at them as such a one-hit wonder I just figured they were owned by one of the giant toy behemoths or by private equity that has a perfectly good little business, it's hot, you're selling them. But knowing these are public, the first thing that came to mind was, I would be scared out of my mind to own this thing stand-alone because I look at it and say, "That is a one-trick pony that they're offering." The breadth of their offerings is massive. Yes, you get Star Wars, Harry Potter. You can get Princess Diana and the royal family if you want. You can get any pop culture. They're everywhere. And they continually are releasing new series. The one I have here that I held up a minute ago is from Star Wars like series eight, but there's a bunch more, focused on this movie or the classic characters or Rogue One or Last Jedi or whatever.

Kline: Boba Fett dressed as Santa. There's every level of gimmick here.

Gillies: Yeah, there really are. You loved the second Fantastic Beasts and Where to Find Them movie, now you can buy the Johnny Depp knockoff. I can't imagine how many of those they made, but you know they had to make some run.

Kline: And they're going to have to take buybacks, or you're going to see -- and you're seeing it now in Five Below -- the oddball ones that didn't sell, Johnny Depp's sidekick in Fantastic Beasts, or not R2D2 but R2B4, those are showing up in Five Below, and you're going to start to undercut the market. It's very hard to maintain a hot product. Give me one example ever of that happening if it's not a playable product. Barbie, Hot Wheels, but those are toys. This isn't a toy.

Daniel B. Kline has no position in any of the stocks mentioned. Jim Gillies has no position in any of the stocks mentioned. Nick Sciple has no position in any of the stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.