Funko, Inc. (NASDAQ:FNKO) Could Be Riskier Than It Looks

There wouldn't be many who think Funko, Inc.'s (NASDAQ:FNKO) price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S for the Leisure industry in the United States is similar at about 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Funko

How Has Funko Performed Recently?

Funko has been struggling lately as its revenue has declined faster than most other companies. Perhaps the market is expecting future revenue performance to begin matching the rest of the industry, which has kept the P/S from declining. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Funko will help you uncover what's on the horizon.

How Is Funko's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Funko's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. Still, the latest three year period has seen an excellent 50% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the four analysts covering the company suggest revenue growth will show minor resilience over the next year growing only by 2.9%. While this isn't a particularly impressive figure, it should be noted that the the industry is expected to decline by 1.2%.

Even though the growth is only slight, it's peculiar that Funko's P/S sits in line with the majority of other companies given the industry is set for a decline. Apparently some shareholders are skeptical of the contrarian forecasts and have been accepting lower selling prices.

The Bottom Line On Funko's P/S

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Funko currently trades on a lower than expected P/S since its growth forecasts are potentially beating a struggling industry. There could be some unobserved threats to revenue preventing the P/S ratio from matching the positive outlook. One such risk is that the company may not live up to analysts' revenue trajectories in tough industry conditions. It appears some are indeed anticipating revenue instability, because the company's current prospects should normally provide a boost to the share price.

Having said that, be aware Funko is showing 3 warning signs in our investment analysis, you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com