What a time it’s been for Funko. In the past six months alone, the company’s stock price has increased by a massive 44.2%, reaching $6.08 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Funko, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Funko Will Underperform?
We’re happy investors have made money, but we’re cautious about Funko. Here are three reasons why FNKO doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Funko’s 2% annualized revenue growth over the last five years was weak. This was below our standards.
2. Breakeven Free Cash Flow Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Funko broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.
3. New Investments Bear Fruit as ROIC Jumps
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Fortunately, Funko’s ROIC averaged 3.3 percentage point increases each year over the last few years. This is a good sign, and we hope the company can continue improving.
Final Judgment
Funko doesn’t pass our quality test. After the recent surge, the stock trades at 55.8× forward P/E (or $6.08 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.
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