International Licensing And Diversified Offerings Will Boost Future Success

Key Takeaways

• Expansion into global markets and diversification into sports, gaming, and music aim to increase revenue and capture a larger international market share.
  
• Strategies like sourcing diversification and cost discipline measures are intended to enhance net margins and maintain financial resilience amid economic volatility.
  
• Withdrawal of 2025 outlook, significant U.S. market pressures, and liquidity risks suggest substantial financial challenges impacting Funko's operations and profitability.

Catalysts

A pop culture consumer products company, designs, manufactures, and markets licensed pop culture products in the United States, Europe, and internationally.

• Funko's efforts to expand its global footprint, including opening licensed and partner stores in strategic locations like the United Arab Emirates, China, and the Philippines, indicate an opportunity to increase international revenue and capture a larger market share in areas where toy market growth is higher than in the U.S.
  
• Diversification into sports, gaming, and music, along with launching products at major events like NBA All-Star Weekend, highlights a strategy to attract new fan segments and increase revenue via high-demand, trending collectibles.
  
• The company's swift actions to mitigate tariffs, including significant sourcing diversification to Vietnam and Cambodia, are expected to enhance net margins by reducing reliance on Chinese manufacturing and minimizing the impact of increased tariffs on cost of goods sold.
  
• Comprehensive cost discipline measures, such as workforce reductions and renegotiated freight contracts, aim to lower operating expenses and improve net margins, enabling the company to maintain financial resilience amid volatile macroeconomic conditions.
  
• The growth of Funko's direct-to-consumer business, supported by the Fan Rewards loyalty program and personalization initiatives, suggests a targeted approach to boost profitability and earnings by leveraging higher-margin sales channels and enhancing brand loyalty.

Funko Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Funko's revenue will grow by 6.9% annually over the next 3 years.
• Analysts are not forecasting that Funko will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Funko's profit margin will increase from -1.9% to the average US Leisure industry of 6.3% in 3 years.
• If Funko's profit margin were to converge on the industry average, you could expect earnings to reach $79.2 million (and earnings per share of $1.3) by about May 2028, up from $-19.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.8x on those 2028 earnings, up from -9.7x today. This future PE is lower than the current PE for the US Leisure industry at 18.1x.
• Analysts expect the number of shares outstanding to grow by 4.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.03%, as per the Simply Wall St company report.

Funko Future Earnings Per Share Growth

Risks

• The withdrawal of the 2025 outlook due to complexities and uncertainties related to global tariffs and consumer behavior suggests a challenging external environment, potentially impacting revenue and earnings forecasts.
  
• The tariffs and select consumer behavior pressures mentioned are impacting the U.S. market significantly, with potential direct consequences on net margins and overall profitability.
  
• Negative adjusted EBITDA of $4.7 million and high SG&A expenses highlight current financial struggles, suggesting pressure on net margins and earnings.
  
• The mention of going concern disclosures in the 10-Q filing and the need for covenant relief negotiations with lenders indicate potential liquidity and financial stability risks, affecting the company's financial health and ability to sustain operations.
  
• The management's indication of consumer behavior being more 'choosy' coupled with the decision to hold the price line despite rising costs implies pressure on product pricing, which could further squeeze net margins.

Valuation

• The analysts have a consensus price target of $7.0 for Funko based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $79.2 million, and it would be trading on a PE ratio of 6.8x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $3.51, the analyst price target of $7.0 is 49.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.