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Looking to Spice Up Your Portfolio? Buy Funko Stock

There’s no doubt that investing is serious business.

Inflation, rising interest rates and a bear market have certainly set many on edge, and the general consensus is that times are hard. Better to be conservative with your cash. 

But buying well doesn’t mean you can’t have some fun as you’re populating your portfolio – even in this economy. Funko (FNKO 4.10%), which is up nearly 15% year to date, is a perfect example of that mentality. 

It has a massive moat…

You might not think you know Funko, but I’m willing to bet that you’re familiar with plenty of its products. Funko is the brains behind most of the pop culture collectibles you see everywhere, including bobbleheads portraying your favorite athletes, celebrities and fictional characters. The company also produces vinyl figurines and action figures, as well as plush toys, apparel, accessories and games. 

What you may not know is that Funko has done a fantastic job of establishing itself as the company to beat in the collectible market. It partners with more than 25,000 retail outlets globally, including all the biggest names in consumer retail-such as Walmart (WMT 2.02%), Amazon (AMZN 3.53%) and Target (TGT 3.10%)-and it has more than 1,000 active licensing agreements in place, with over 200 companies and brands. 

Long story short, if you’re looking for merch, Funko is a good place to start. 

To maintain that wide and protective moat, Funko does an excellent job of staying visible and relevant in its market. The company acquired the high-end collectible company, Mondo in June, adding vinyl records, posters, and other collectibles to its platform. 

It also recently launched its exclusive Game of Thrones (GoT) Digital Pop! collection, tapping into the very current excitement around the franchise’s newly released prequel, House of the Dragon, while also taking advantage of the growing cyber-merchandise trend of collectible non-fungible tokens (NFTs). In a similar move, the company partnered with Warner Brothers to produce a “phygital” collectible bundle, built around a vintage DC comic book.

Funko boasts an impressive 70-day concept-to-completion turnaround, so new products can hit the shelves quickly. Add that to the company’s use of emerging technologies and its strategic partnerships with big-name fan favorites-and that gives Funko a huge advantage. 

… and a LONG runway. 

Okay, the collectibles are cool, you’re saying, but really… how big of a market can that actually be? You might be surprised. 

Funko estimates its total addressable market (TAM) at around $161 billion, including both sports and entertainment products. The company reported $1.03 billion in net sales for fiscal year 2021, meaning that it has only tapped about six percent of the total market opportunity. And that gives this company a lot of room to grow! 

To tackle that massive TAM, Funko has been posting solid growth in its most recent quarterly and year-to-date sales. Total net sales increased to $315.7 million for the second quarter of 2022, up by almost 34% year over year. 

In the U.S, Funko’s net sales grew 41.7% compared to the same period last year, driven by Loungefly, the company’s licensed apparel brand, direct-to-consumer, and mass market sales. Loungefly reported a record quarter, showing second quarter net sales of $70 million, up 114% from the year-ago period. Direct-to-consumer (DTC) sales grew 26% year over year in the second quarter; last year, the company reported $111 million in DTC revenue, and management is targeting a 20% compound annual growth rate of that segment through 2026. 

Time to Buy?

It’s worth noting that the company’s net income dropped a bit in that second quarter earnings report-$15.8 million compared to $20.9 million in Q2 of last year. But that’s mostly due to a one-time expense of relocating its distribution center to a new and much larger facility in Arizona. Higher freight costs and expenses for software improvements also contributed to this dip, and Funko projected all of it earlier this year. 

Funko shares are trading for around $21, giving it a price-to-sales ratio of less than 1. The stock is cheap, but the company has potential in spades. Funko boasts a gross margin of 32.7%, meaning that management is doing a solid job of controlling costs. 

Here’s one more thing to consider: While the brands and individual properties might change, pop culture isn’t going anywhere. There will always be blockbuster movies and epic television sagas and celebrity-level athletes. There will always be people and characters that warm our hearts, inspire our future and leave us feeling nostalgic about our past. 

And there will always be fans ready to buy.

Adding Funko to your portfolio is an easy way to invest in that kind of long-term loyalty, and that has Foolish written all over it!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Kate Luther has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Funko, Inc., Target, and Walmart Inc. The Motley Fool has a disclosure policy.


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