A couple of months ago my youngest son (age 11) gave me a copy of his updated wish list and it was a big departure from past years. Instead of a list of assorted items it had a dozen items in order of "what I want most" and they were all Funko Pop figures.

I took him to a local store in Boston (Newbury Comics) where they sell lots of these Funko figures and he picked out a few. The store manager talked to me about how "everyone finds one or two of these they love". He also pointed out a locked case of "collector" Funko figures that went for much higher prices.

This led me to do a little more research (and buy some stock). Our original note (Funko Bobbleheads?) was a bit off the mark (the heads don't "bobble") but is still worth a read vis-a-vis the business and valuation. The IPO priced below the range at $12 in November of 2017. After languishing for a while the shares perked up in a big way, on volume.

One thing we didn't realize is how well Funko could create "rare" Pop figures and incite a community of collectors who would go to either great lengths or great expense to acquire them. Here's one of 10 figures that go for $1000 or more. Here's another video that goes into more background about how Funko uses events like Comicon to generate buzz.

Now on eBay, the mania has continued to surge. At the top of the list is the "rare" Stan Lee signed pair listed for $60,000. The parallel with the whole "beanie babies" craze seems valid. It's a different demographic but it's blossoming into a full-fledged mania.

The Business is Good

The hype is real but the company had strong operating metrics in late 2017 when they went public. At the time we put revenues at $426M. For this year they are expected to do over $600M. Analysts expect they can do $700M next year. $FNKO is also profitable and analysts are estimating earnings of $1/share next year.

Recent announcements of deals to produce Pokemon and Fortnight based characters have lent some support to future growth expectations.

Although the "fad" nature of the Pop craze has attracted (or will attract) short sellers the company has been around for a long time and shown consistent, profitable growth. And while the high prices for Funko figures in the secondary market are crazy - they don't have a direct impact on revenue and profit for the company.

Two firms have downgraded the shares after the recent doubling of the share price. At 20x 2019 estimates the stock is no longer objectively cheap and estimates of 15% or so top-line growth would argue for a 20-25x multiple which is close to where the shares are now.

But recently growth has accelerated and is tracking well above those estimates. New investors are betting the company can grow faster than analysts expect and get a better a multiple.

A "Purveyor of Pop Culture?"

One argument that will rage between the bulls and the bears on this stock will be whether or not $FNKO can sustain and grow their position if the current collector mania subsides.

The CEO presented at the JPMorgan conference in May of 2018 and made some comments in the Q&A that help illustrate the incredible diversity of consumer interests that Funko taps into. While some figures may garner all the attention, it's a very broad base of demand.

"Everybody is addicted to Fortnite. Theatrical. The Black Panther movie, the Avengers: Infinity War movie, the new Han Solo movie coming out. A wonderful thing we like to call evergreen content, which is back catalog content, classic stuff like Ghostbusters or Moana now after 3 years out, 2 years after it's been released now, has moved over to classic evergreen content. Taking -- everything that's going on in sports, NFL, NBA, UFC, WWE, Major League Baseball, English Premier League. And then music, all those different genres have fandom around it. And these fans want to express their affinity for their favorite team, their favorite movie, their favorite cartoon character. We provide licensed whimsical merchandise. Most of it -- of which is sub-$10 to tie people emotionally to the things that they love. Our products are whimsical and they're fun. We carry over 1,100 licensed contracts, which is the most in the industry. We have world-class speed to market. We're much like a Zara in fast fashion. We can deliver a product into the marketplace in under 90 days. Most toy companies think in months and years. Funko thinks in days and weeks. Speed to market with pop culture is absolutely essential. And then getting it out there to a very engaged fan base. We interact with our fan base day to day within social media, more than Hasbro, LEGO and Mattel combined. So taking that interaction with the fan base, providing experiences like New York Comic Con, San Diego Comic Con, Disney D23, Star Wars Celebrations, creating events around the products we make, all is resonating on a global basis. And the one thing exciting about all the content being created from all those different avenues I previously talked about is the content is resonating globally. So we're up 140% rest of the world, still off of a 16% increase in North America for our sales. But the fact that there's a home for this content on a global basis is exciting." - Brian Richard Mariotti, CEO of Funko

Another worthwhile segment is how he created a relationship with Netflix $NFLX which wasn't even thinking about licensing characters created from their original content.

"Yes. Netflix, first original content series was Stranger Things. I don't know how many of you guys have watched that show, but it's a global phenomenon. I call that -- I binge watched that show the first weekend it came out, 8 hours worth of consumption, which my wife -- the excuse was it was research. My in-laws were in town, a lot of family. And if I could just find a way to escape for 2-, 4-hour periods over a weekend and avoid the in-laws by doing research for work, it worked out very well. The show is great. I called Netflix on Monday morning. They didn't have a licensing program set up. So we tried to explain through a couple different levers, just trying to get them interested. One is obviously we pay some money for in advance, a couple of million dollars to license the property. To Netflix, at that time, that wasn't anything that they were interested in. $2 million didn't mean a lot to them. So we sold them on the idea of keeping their brand relevant. When Netflix drops a show, they drop the entire show at once. Then you got to wait a year to 18 months till season 2 happens. So with our pop culture fan base and the coverage we get across the web on a global basis of all the products we release on a constant basis, we can work with retail partners, creating specific releases with a Walmart, a Target, a Hot Topic, a GameStop with Stranger Things content and keep their brand relevant in the market -- in mind share as we wait for season 2. That really got them interested. And the third thing that really worked was the show creators absolutely loved and collected our products and wanted to see us represent their products in our unique style and way. It's worked really well. The relationship has bloomed. We are the global hardlines provider for all Netflix original content. And the idea of getting that first right on everything that they create and deciding whether we want to leverage that again with consumer products has been a phenomenal opportunity for us." -  Brian Richard Mariotti, CEO of Funko

The CEO makes a strong case for how Funko is different and has a sustainable model for long-term growth and profitability.

Risks & Valuation

Funko reports tonight and we'll be updating this section and our model after the call.

The company has strong fundamentals and profitability which will support some price for the shares. However, the volatility is likely to continue.

One issue is supply - FNKO is backed by private equity. In 2013 a firm called Fundamental Capital acquired a major controlling interest, only to be topped in 2015 by ACON who did the same. These two firms own the majority of stock and are likely to want to sell these shares at these prices. The IPO was only primary shares.

As a company, Funko has grown from $107M in revenues in 2014 to $600M this year while being profitable and increasing margins along the way. It's the sort of business long-term investors like although the ultimate size of the opportunity for $FNKO isn't entirely clear. Management believes they can keep growing in the high-teens and ultimately reach $1.5B or $2B in sales.

(Click on image to enlarge)