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Why Funko Inc. Stock Just Dropped 14%

By Rich Smith – Updated Sep 11, 2018 at 12:45PM

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What went up is coming back down.

What happened

It has "fun" built right into its name, but investors in toymaker Funko Inc. (FNKO 2.32%) aren't having a lot of that today watching their stock sink 14% as of noon EDT. Why are Funko shares dropping? No one seems 100% certain.

Management hasn't issued any press releases today, nor filed anything of interest with the Securities and Exchange Commission, either. No upgrades have been issued, nor downgrades -- nothing at all to explain the stock's sudden funk.

Cartoon characters examine falling stock chart

Why is Funko stock falling? A better question is why it went so high to begin with. Image source: Getty Images.

So what

If I had to pick one thing that's most likely to explain Funko's decision to resume obedience to the laws of gravity today, it would be this: So far this year, Funko shares are up 367%. While that's nice news for shareholders, I'm not 100% convinced that Funko stock is worth 367% more than it cost nine months ago.

Although technically "profitable," Funko generated no free cash flow (FCF) whatsoever in 2017, according to data from S&P Global Market Intelligence, and just $800,000 over the past 12 months. This means that for every $1 in GAAP "profit" the company claims to be earning, its actual cash profits have been more like $0.05.

Now what

Granted, Funko's stock price surge isn't entirely without reason. The company burned a lot of cash last year, and that's the main reason its trailing-12-month FCF is still so small. Over the first couple of quarters in 2018, it's generated respectable FCF tallies of $3.6 million in Q1 and $8.3 million in Q2. Run-rate that out, and Funko looks on course to generate nearly $24 million in cash profits this year.

Still, with a market cap of $1.3 billion, even $24 million in FCF will give this stock a very rich-sounding price-to-FCF ratio of 54. That's an ambitious valuation for a stock whose primary products look an awful lot like fads. I strongly suspect investors who are cashing in their Funko stock winnings today are making the right move.

Rich Smith 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.

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