Shareholders of Funko would probably like to forget the past six months even happened. The stock dropped 56.7% and now trades at $5.14. This 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? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Funko Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why FNKO doesn't excite us and a 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. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Funko grew its sales at a sluggish 6% compounded annual growth rate. This fell short of our benchmark for the consumer discretionary sector. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Funko, its EPS declined by 15% annually over the last five years while its revenue grew by 6%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Funko’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Funko falls short of our quality standards. Following the recent decline, the stock trades at 24.5× forward P/E (or $5.14 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of our top digital advertising picks.
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