Funko Bobbleheads?

It's hard to believe that Funko (FNKO), a company that makes bobbleheads, is going public - and they say the IPO market isn't robust! Not only that but the deal is led by Goldman Sachs, JP Morgan and BofA with five other co-managers on the cover. [We have both the FNKO IPO slide deck and roadshow transcript online. Of course, you'll want to read the 282 page S-1 filing so we link to it for your convenience.]

On the plus side bobbleheads are a pretty good business. Gross margins of 40% and EBITDA margins of 20% are impressive. Funko did $427M in revenues during 2016 with EBITDA of $97M. So the numbers are not bad. Even though this is the type of product that always seems to be on sale in retail channels as in "2 for $10." The company expects September quarter revenues to be just over $142M with net income of $5-6M. EBITDA for the period will be about $24M.

Of course, Funko doesn't position themselves as a bobblehead maker - they are a "purveyor of pop culture" and a "category manager" of the genre for large retailers and content owners. There is some weight to the claim as they have been aggressive and creative in their licensing which has given them the most comprehensive set of products in the category. Their portfolio includes more than 1,000 licensed properties from the very large (Star Wars) to the very niche (Sharknado.) They also have the distribution with all the major retailers - you know the list.

Management also makes the case that pop culture has "entered a new phase" thanks in part to the proliferation of content and social media. Another leg to the growth stool is that geeks are "out of the basement" and into the mainstream. This is a tougher claim to back up. It is clear that the CEO, Brian Mariotti, and the team at FNKO are intensely focused on the category and have built execution capability to develop and manage thousands of products. Their supply chain is at the point where they can go from design to store shelves in three or four months which in this industry is fast. In some cases, they claim to be able to do it in 70 days. Product development is done in a matter of days and the upfront costs for a new design are less than $10,000. Revenue is very diversified both by content provider and channel. FNKO also has a good deal of "long tail" product that isn't tied to a current release of a new movie, show or game.

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Disclosure: We do not have any vested interest in the shares of this stock at the time of writing and publication. We may however take a position post publication and are not under any obligation to ...

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