Toy Story: Bank Of America Bullish On Funko's 2019 Opportunities

A strong 2019 content lineup is shaping up nicely for Funko Inc (NASDAQ: FNKO), according to a bullish Bank of America Merrill Lynch. 

The Analyst

Analyst Rafe Jadrosich reiterated a Buy rating on Funko with a $23 price target.

The Thesis

A strong content schedule and a return to growth at Walmart Inc (NYSE: WMT) are positive for Funko in 2019, Jadrosich said in a Thursday note. (See his track record here.) 

After hosting an investor meeting with Funko CEO Brian Mariotti, the analyst said he sees potential upside in his 2019 revenue forecast, driven by a meaningfully stronger content lineup versus 2017 and 2018. 

The stronger content schedule — led by "Star Wars Episode 9," "Frozen 2," "Avengers: Endgame," a "Spiderman" sequel, "Far From Home," a new "Stranger Things" season, a new "Rick & Morty" season, new live action Walt Disney Co (NYSE: DIS) movies and the final season of "Game of Thrones" — should create incremental licensing opportunities for Funko in both theatrical and TV, Jadrosich said. 

BofA expects another year of healthy growth in video games driven by a full year of "Fortnite" and continued momentum in "Overwatch."

Funko will expand its Pokemon characters and distribution in 2019, the analyst said. 

Wal-Mart Growth Likely  

Funko should return to growth at retailer Walmart in the fourth quarter and through 2019 after suffering a 40-percent sales decline year-over-year in the third quarter, Jadrosich said.

The shift comes due to a migration of Funko's assortment out of the toy aisle and into the entertainment section, he said.

“Funko underwent a similar transition at Target Corporation (NYSE: TGT) two years ago and experienced a significant increase in sales, and now sells product in five separate locations within Target. We see the opportunity to more than double its shelf space over time at Walmart and believe the brand is under-penetrated at Walmart compared to traditional toy companies." 

Funko is investing in multiple long-term growth initiatives including an expansion into board games, a recent launch in 61 Foot Locker, Inc. (NYSE: FL) locations and increased direct-to-consumer investments, the analyst said.

Funko Looks To Shift Production From China 

Tariffs in China are immaterial to Funko despite the company producing 50 percent of its product in the country, Jadrosich said. He expects that number to decrease to 25 percent by the end of 2019, with the company looking to move production to a more favorable location.

Overall, Jadrosich says Funko’s strong brand momentum has continued into the fourth quarter, with Alphabet Inc (NASDAQ: GOOG)'s Google trends increasing year-over-year and nearing all-time highs.

Funko Pop is also in the top 20 overall Amazon.com, Inc. (NASDAQ: AMZN) keyword searches.

Price Action

Funko stock was down 2.41 percent at $13.38 at the close Friday.

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