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Take a look at the small-cap growth category and you’ll find a sea of ​​red year-to-date, with very few exceptions: investors just don’t want to take a chance right now. Funco (NASDAQ: FNKO), an eclectic toymaker best known for its Popular! figurines which are well presented in the toy sections of department stores in the United States and around the world, is one of the few small-cap growth stocks to take advantage of a recent uptrend and avoid massive losses since the beginning of the year.

Normally, when smaller stocks like this outperform, it’s usually due to hype and misguided mania – but in Funko’s case, it’s all about fundamentals and value. This company continued to produce spectacular results and drive strong execution, which is no small feat in a time that has been very challenging for consumer products companies with limited supply chains and rates. high freight. While Funko’s gross margins have also been hit alongside the rest of the industry, its meteoric revenue growth and plans to consolidate and cut back on its operations set it apart from the pack.

Data by Y-Charts

For all tastes: the bull case for Funko revisited

I’m staying bullish on Funko for a number of reasons. In particular, I echo Funko’s most recognizable motto: the company offers something for everyone. It’s important to remind investors that Funko’s products span the pop culture universe and appeal to fans of nearly every recognizable brand.

In the past, diversification for Funko meant adding new “properties” and brands to make figures. However, more recently, the company is also diversifying its merchandise types. Its “other” category, displayed on the right side of the snapshot below, encompasses everything from clothing to stuffed animals and accessories like backpacks and school supplies. Now accounting for about a quarter of Funko’s revenue, the “other” category grew at an impressive 45% year-over-year in the fourth quarter.

Funko Products

Funko Products (Funko Q4 Investor Presentation)

Here’s a full rundown of what I think are Funko’s main bullish drivers:

  • Unparalleled ability to find and monetize the best content. Since fortnite for Pokemon for wonder and other brands, Funko’s ability to source the best content is unmatched. No one brand dominates Funko’s revenue, so it’s well-diversified to benefit from a general increase in entertainment and pop culture.
  • Push towards international growth. Although primarily an American company, Funko is generating strong growth overseas, particularly in Europe where, over the past quarter, Funko has managed to achieve revenue growth of around 60% year-on-year.
  • NFT. Last year, Funko acquired a company called TokenWave, which allowed it to finally cut its teeth in the NFT craze that erupted amid the pandemic. Funko notes that its early token offerings “sold out in minutes,” potentially opening the door to an entirely new and rapidly growing revenue stream in the future.
  • Healthy profitability. Surprisingly enough for a small cap company, Funko is profitable on both an adjusted EBITDA and GAAP earnings basis. In my opinion, investors’ hesitation towards small-cap stocks usually stems from their prioritizing growth over profitability, but in Funko’s case, it can boast of having both.

Valuation report

Not only is Funko growing like a weed and exhibiting various fundamental tailwinds, but the company is also trading at a very attractive value.

At the current share price of $18, Funko trades at a market cap of $914.2 million – still a small-cap company. After offsetting $83.6 million in cash and $173.2 million in debt on the company’s most recent balance sheet, Funko’s bottom line the enterprise value is $1.00 billion.

Meanwhile, as seen in the snapshot below, Funko is heading for revenue growth of 20-25% per year (indicating revenue of $1.23-1.29 billion), a Pro forma EPS of $1.75 to $1.91 and EBITDA margins which should be roughly stable. to FY21 (which was 14.6%) – translating into adjusted EBITDA of $180-188 million.

Funko FY22 Outlook

Funko FY22 Outlook (Funko Q4 Investor Presentation)

With these parameters, Funko’s valuation is:

  • 5.4x EV/adjusted EBITDA FY22
  • 9.8x FY22 EPS

For a company that expects to maintain revenue growth of around 40% per year through Q1, I’d say those are pretty attractive multiples to pay.

Q4 Download

Now let’s take a closer look at Funko’s latest fourth quarter results, which have sparked renewed excitement about the title. The fourth quarter revenue summary is shown below:

Funko Q4 Results

Funko Q4 Results (Funko Q4 Investor Presentation)

Funko’s revenue grew at a breathtaking 49% year-over-year to $336.3 million, beating Wall Street expectations of $271.9 million (+20% year-over-year). Funko’s revenue growth also accelerated significantly from 40% year-over-year growth in the third quarter.

A few other metrics are worth mentioning: Figure revenue grew 50% YoY, while “other” products grew 45% YoY. In particular, Funko performed strongly in its relatively new board game category. The company launched 40 new titles just in 2021.

Funko also grew in all geographies, but performance was particularly strong in Europe, where revenue increased. 59% y/y.

Here are some of the comments from CEO Andrew Perlmutter’s prepared remarks on the fourth quarter earnings call, detailing the company’s growth drivers for FY22 as well as outstanding fourth quarter performance drivers:

With this new brand structure, we are better aligned to execute on our four growth pillars. Our first growth pillar is continued innovation within our core collection brand category, while our second growth pillar is sustained revenue diversification through products and brands adjacent to our core portfolio.

Our third pillar of growth is the continued expansion of our D2C e-commerce platform. And finally, our fourth pillar is international expansion. Here, we will continue to leverage the breadth of our brands and selectively add resources and capabilities to open key international markets.

I will now share some of the highlights of the quarter. As part of our first pillar of strategic growth, we delivered another excellent quarter with the strength of our collectible brands and all channels. The Pop! the brand grew 41% year over year in the fourth quarter. Our continued success with Pop! Steps, not only from our industry-leading portfolio of properties, but also from our strong fan engagement and the innovation we bring to Pop! range of products.

We’ve introduced innovative new figures and designs and successful seasonal product lines. Our participation in the Macy’s Thanksgiving Parade with our balloon, featuring Grogu from the hit series, The Mandalorian, is a great example of the strong fan engagement and innovation we continue to bring to the brand.”

The only black mark that tainted the strong topline performance was transportation costs, a concern cited by all consumer products companies. Due to these logistical constraints, Funko’s gross margins fell 330 basis points to 33.9%.

The company was able to offset this slightly, however, with a 40 basis point reduction in selling, general and administrative expenses in the quarter as a percentage of revenue. Adjusted EBITDA margins fell 310 basis points to 11.6% in the quarter, but still increased 11% year-over-year to $38.9 million. However, adjusted EBITDA margins for the full year increased a further 210 basis points to 14.6%, while dollar adjusted EBITDA increased 87% y/y at $149.9m.

Funko Adjusted EBITDA

Funko Adjusted EBITDA (Funko Q4 Investor Presentation)

From an optimistic perspective, COVID-induced port congestion and logistics price spikes are a temporary phenomenon. Funko’s forecast already factors in an increase in freight rates in the first half of 2022, with an expected easing in the second half.

Key points to remember

Although hardly recognizable by the traditional investor, Funko represents an incredible combination of investable merits: rapid growth rates, strong earnings performance, clear drivers for future expansion and an attractive valuation. Keep enjoying the recent upward momentum here.