It's been a volatile first two months of trading for Funko (NASDAQ:FNKO), the company behind the Pop! line of vinyl big-headed collectible dolls based on licensed characters. The latest turn for the purveyor of pop culture came Tuesday morning, when BMO Capital downgraded the stock on concerns of problematic trends during the telltale holiday shopping season.

Funko investors have been on a wild ride since the stock went public at $12 in early November, below its initial pricing range of $14 to $16. Investors weren't buying into the maker of trendy figures. Funko stock opened at $8, closing at $7.07 on its first day of trading. The shares would go on to bottom out at $7 the next day before turning higher. Analysts initiating coverage of the stock with bullish ratings a few weeks later helped justify the bounce, and Funko's first financial report as a public company earlier this month was initially well received. However, the stock was already drifting lower -- declining in nine of the past 10 trading days -- before Tuesday morning's downgrade. Funko closed at $7.14 on Monday, a cruel roundtrip to essentially where it was after its first day of trading.

Funko figures on display with a lit FUNKO sign above them.

Image source: Funko.

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Funko is already one of this year's many busted IPOs, and Gerrick Johnson at BMO Capital downgrading the stock on Tuesday obviously isn't going to help. His channel checks show that inventory of Funko merchandise is building up at retail locations, and merchants are reportedly turning to discounting to clear out the excess Pop! figures. 

Johnson was one of the analysts initiating coverage of the stock with a bullish outperform rating in late November, in theory a non-event since it was basically the underwriters trying to justify why they took Funko public at $12 earlier that month. He is changing his rating to a neutral market perform, lowering his price target from $10 to $7.50. 

Net sales rose 21% to $142.8 million for the third quarter, but earnings and adjusted EBITDA went the other way as expenses outpaced the top-line spurt. The stock opened 6% higher the day after posting its first financial, but it would go on to close lower as the market's skepticism grew after digging into the numbers. Funko's growth came from broadening its active properties from 316 to 400 over the past year and its push overseas, as stateside top-line growth inched just 7% higher.

Johnson is now warning that his channel checks show Funko's performance has continued to deteriorate relative to expectations since its third-quarter report was announced two weeks ago. The fear for Funko investors will always be that its Pop! figures are no longer trendy, and even a move like acquiring a small animation studio last month to dabble in video content isn't going to make the market feel any more comfortable.

The silver lining for Funko is that as a busted IPO with a recognizable brand it could be a compelling acquisition target for larger toy makers, especially now that the country's two largest players are apparently no longer considering a combination. Buying a stock as a potential buyout play can be pretty desperate, though, and there's always the fear that Funko's U.S. popularity will continue to fade. It's a thorny situation for a stock that has lived a wild lifetime of trading in less than two months.  

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.