Please ensure Javascript is enabled for purposes of website accessibility

Meet the Unlikely Small-Cap Winner That's Up 367% in 2018

By Rick Munarriz – Sep 11, 2018 at 4:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company behind the Pop! vinyl dolls is living up to its corporate moniker as well as its top product's name in 2018.

One of last year's biggest IPO duds is cleaning up nicely in 2018. Shares of Funko (FNKO 3.59%) keep climbing, hitting fresh new highs this week. The company behind the Pop! line of vinyl big-headed collectible dolls has bounced back after a rough Wall Street debut on the strength of back-to-back blowout quarters, game-changing licensing deals, and perpetually boosted guidance. 

Funko is one of this year's biggest winners, up a whopping 367% through Monday's close. It's a surprising turnaround for a company that hit the market as a broken IPO late last year. Nobody wanted a piece of Funko when it was hoping to hit the market between $14 and $16 a share in early November. Underwriters had to settle for $12, and even that was too ambitious. The stock opened at $8, and by the end of the year had whittled all the way down to $6.65. Funko seemed to be out for the count, but it was really just setting up the starting line for the mother of all rallies in 2018.

Funko illuminated sign with Funko dolls on shelves.

Image source: Funko.

Pop star

Funko is picking up the pace this year. Net sales have risen 35% through the first half of this year, up from last year's 21% clip. Growth is steady across product categories and geographical territories, something that wasn't the case late last year when domestic sales had slowed to a single-digit clip. 

There's refreshing balance these days. International sales rose 32% in Funko's second quarter, in line with the 33% domestic uptick. Sales of Funko's flagship figures rose 31% -- accounting for 83% of total sales -- with a 42% surge in other product categories. Margins are improving, and adjusted earnings more than doubled. The 121% surge was a lot better than analysts expected, just as Funko's bottom line blasted through Wall Street targets in the first quarter.  

Sentiment has clearly turned in favor of Funko this year. The Fortnite and Pokemon figures that it showed off during Comic-Con in San Diego this summer ahead of its second-half release were the toast of the iconic event.

Not everyone is sold on Funko's momentum continuing at this point. BMO Capital Markets analyst Gerrick Johnson feels that the core Pop! vinyl collectibles are closer to the end of their popularity cycle than the beginning, and his $10.50 price target on the shares is a little more than a third of where the stock is now. 

Funko's stock has likely outpaced its improving fundamentals in 2018, but it also began the year at depressed price levels. Funko keeps boosting its forecasts higher. Last month it moved the goalposts again. It is now targeting $620 million to $630 million in net sales, a roughly 15% increase. EBITDA should grow even faster, up 20% at its new midpoint. These revised metrics aren't perfect, suggesting decelerating growth as the balance of 2018 plays out. A broadening arsenal of products gives it a better chance of landing products that resonate with fans of its licensed franchises, but it also wouldn't be a surprise to see the stock take a breather from being one of this year's biggest upside surprises.

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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.