Are collectibles the new hot and trendy investment opportunity that you are looking for?

Company Background

Headquartered in downtown Everett, WA, Funko is one of the leading creators and innovators of licensed pop culture products to a diverse range of consumers. Funko designs, sources and distributes highly collectible products across multiple categories including vinyl figures, action toys, plush, apparel, housewares and accessories. The company aims to provide consumers with tangible ways to take their fandom offline. Funko’s vision as a business is that “everyone is a fan of something,” and that “Funko has something for every fan.” Funko sells items like bobbleheads, sports, and TV memorabilia, and pop culture fashion like bags and purses. The company’s distribution channels were previously focused on major retailers like GameStop, WallMart, SafeWay, Target etc. However, Funko has seen a tremendous and consistent sales growth across its online platform, which has allowed the company to become more independent. What makes Funko attractive as a stock pick is the company’s clear expertise and institutional knowledge in the collectible world as it has been around since 1998.

Products are designed at the Funko headquarters in the United States. New figures are designed with input from licensors, in-studio artists, and fans through social media. Funko artists use ZBrush to create digital models that are revised before being made into prototype sculptures, which are sent for approval from manufacturers and licensors. The completed figures are manufactured at factories in China and Vietnam.

Funko has created approximately 20 thousand (19,913) different products in dozens of different toy lines since its inception. The first, Wacky Wobblers, is a line of bobbleheads depicting various characters, mainly from popular culture, such as Betty Boop, Cap’n Crunch, and The Cat in the Hat. The company’s mascot, a recurring character in the Funko franchise, is Freddy Funko.

Funko’s Pop! Vinyl line are figures modeled in a style similar to the Japanese chibi style, similar to Good Smile’s Nendoroid figures. The figures typically depict licensed characters from franchises such as Doctor Who, Marvel, DC, Disney, Star Wars, Wizarding World, and other pop culture entities. After a preview line of DC Comics characters were released at San Diego Comic-Con 2010, the Funko Pop! line of products was fully revealed in 2011 at the New York Toy Fair.

By 2016, it had outgrown its original headquarters in Everett and announced plans to move into a downtown building with more space and a retail store. Funko acquired British toymaker Underground Toys, also its European distributor, in early 2017. Funko opened its new headquarters and 17,000-square-foot (1,600 m2) flagship store in downtown Everett on August 19, 2017. Funko was listed on the NASDAQ stock exchange on November 2, 2017, but suffered the worst initial public offering of the 21st century, with shares falling by 40 percent and only raising $125 million.

The company opened its second storefront in November 2019, located in Hollywood, Los Angeles. It has 40,000 square feet (3,700 m2) of space and includes life-size statues and movie “sets”.

What is an NFT?

NFT stands for “non-fungible token.” In economics, the term fungibility means that one unit of something is interchangeable for another. For example, every fiat currency out there (USD, EUR, GBP etc.) is fungible because every dollar that one has is equivalent to one dollar that someone else has. What makes NFTs non-fungible is that they’re unique and not interchangeable for something else. We will look into the mechanics of that a little bit later, but let us give you a simple and straightforward example so that you could grasp the concept. Rare automobiles are non-fungible because if I trade you one, I wouldn’t be able to get the exact same car somewhere else. Synonyms of non-fungible are irreplaceable, unconvertible, unsubstitutable.

Traditionally, manufacturers allow for there to be more than one car in a series while maintaining non-fungibility, for example, Ferrari built only 400 cars of the exclusive Enzo model between 2002-2004 and if I have a Ferrari Enzo #100 that’s the one I have and the only one that should exist, with the serial numbers indicating the rarity. NFTs similarly accomplish this by keeping a record of ownership on the Ethereum blockchain. Most companies in the space are private and cannot be invested in via the stock market. However, Funko is a publicly traded company (NASDAQ:FNKO) that investors could buy into, which definitely makes it interesting.

Current Position – Financial Performance & Future Growth prospects

Ever since Funko started its operations it has struggled with the margin pressure that content creators have put on the company. Funko’s business depends heavily on the licensing deals that it has with various content creators. However, by acknowledging their importance in the whole process content creators realize that they can always ask for a higher cut of the revenue if they see fit. This puts Funko with its back against the wall, as it needs to find a way to balance everything and keep the content creators happy, without hurting its profit margins too much. However, it seems that the new Non-Fungible Tokens (NFTs) opportunity is just what Funko has always needed. NFTs are opening up a market opportunity where the connections and ability to quickly cut licensing deals is expected to significantly grow Funko’s business in the future as the company definitely has an advantage from a market position standpoint vs. other companies that may come into the market in the expectation of a gold rush.

And even though that Funko has built its core business model up until now around the process of materializing people’s fandom, it appears that moving forward the greater opportunity might be lying in the dematerialization of that fandom through the blockchain and more precisely through NFTs.

Shares of Funko (NASDAQ:FNKO) surged 24.6% in a single session at the beginning of April, when the toy maker said it acquired a majority stake in non-fungible token (NFT) business TokenHead.

TokenHead currently displays more than 10 million of the blockchain-based tokens and receives more than 100,000 daily visits on its sites.

Funko said the move would extend its pop culture platform into digital assets, and in many ways Funko seems like a natural fit with NFTs as its Pop! figurines, the product it’s best known for, are often considered collectibles.

The company has stated that its plan is to maximize the potential of the NFT market. Said Brian Mariotti, Funko CEO:

“We have the ability to disrupt this space in a way that nobody else is doing right now. We can tie digital NFTs to our fan base and link entities with physical products.”

The company said it would launch its first NFT offerings in June, which will include auctions with a unique property each week starting at $9.99.

What makes Funko a great growth pick is that it’s a combination of a real business with real earnings, and somewhat of a speculative NFT play. More risk-oriented investors will find this as a very appealing fundamental reason to be part of the stock. Funko trades for roughly 19x its 2021 analyst earnings estimates. Their business seems poised for a lot of growth moving forward as the collectibles market is expanding at a very rapid pace. If we look at Funko’s financials since its IPO in 2017, we will find out that the company has roughly broken even. This means that as every new business in an undeveloped market Funko has struggled with turning a profit as selling to retail clients is a hard business model, due to the high operating costs associated with inventory and employees. Thus, we do not recommend for you to use the trailing 12-month company metrics for doing your fundamental analysis, but to rather use the forward estimates, as they will give you a more realistic evaluation of the expected growth curve for the company. Last but not least, we must note that with a Beta of 2.48, Funko is a rather volatile and risk-oriented investment, thus even if you’re looking for a stock with good upside and think the NFT trend has further upside potential, as we do, you should not allocate more than 3-5% of your portfolio to the stock.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 5 months taking the price from the $6 level back in November, 2020 to the $25 level at the end of January, 2021, which was also the 52-week high for the stock. This represented an astonishing 316% gain for the stock in less than 5 months. However, the road to the above-mentioned all-time highs was not easy and was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. There were three 20% corrective movements that took place in December, February and March, but the uptrend remained intact on all occasions. However, the most recent decline in FNKO’s stock occurred in the beginning of April, when the stock plummeted nearly 20% in 1 trading session. The main reason for that steep decline was the broad sector rotation that we saw in the market where capital was circling away from growth stock and into the cyclical and value oriented stocks out there. In addition to that, there were a lot of traders and investors looking to book some profits on that 300% increase from November until now. There weren’t any major company-related negative news or announcements that could justify such a drastic selloff. The important thing is that FNKO’s stock has continued to attract a lot of investors’ attention as it remains one of the leaders in its respective industry – the collectibles market. It is true that this is a small-cap stock pick that we are recommending, which means that it has a very different risk profile when compared to any of the large-cap players like Apple, FB, Alphabet, Microsoft. A company falls within the small-cap parameters in one of two ways, either the company is relatively new and as a result of that it hasn’t established itself well yet, or that the company might have been around for a while, but due to undifferentiated products, poor management, financial difficulties etc. the company struggles to keep its market positioning. It is more than understandable for an investor to accept that a relatively new business will bring higher levels of risk to their capital. However, risk and return go hand in hand in trading. Thus, theoretically speaking the higher the risk is the higher the expected return should be. That is the main reason why a stock like that usually has the opportunity of delivering double-digit and in some instances even triple-digit stock returns. Funko, has the first mover advantage in both the physical and the digital collectible worlds, which indeed seems to be a very high growth segment of the market at the moment. This has turned the stock into a go-to choice for both small retail and large institutional investors looking to invest indirectly in powerful themes like Collectibles, NFTs, blockchain etc.

The stock is currently sitting at $24 per share, which is still offering a great almost 20% discount from the all-time highs around $29.50. We saw that the stock found a lot of buying interest around the $13 level as it tested that support twice in the month of February – once in the beginning and once at the end of the month. The confluence of both the horizontal and diagonal support lines at that mark brought a lot of buyers back into the market and we saw the formation of a bullish continuation pattern on the daily chart, signaling that a strong up move was in the making. Investors saw the opportunity to buy into one of the leaders in the Collectibles space at a 50% discount and didn’t think twice about it. Furthermore, the NFT craze has really started to pick up in the last couple of months, which has definitely drawn a lot of attention to FNKO as a stock. The recent failure of the price to break below the $13 support back in February-March and the subsequent sharp price appreciation could be taken as a signal for the presence of a strong bullish interest in the stock. This in turn confirms that the long-term uptrend has resumed and that the current bullish run will most likely take the price to new all-time highs in the coming weeks. Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. Speculative and trendy stocks like FNKO are expected to see a lot of liquidity being poured into them.

We expect most of the big tech names as well as other market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLK will be one of the best performing sector ETFs in April. We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. We are cautiously bullish on Funko in the short and strongly bullish in the long term and believe that any major price corrections must be treated as a great opportunity to buy this high-growth stock at a great discount, which would in turn give you a chance to maximize your profits to the upside. However, from a purely technical standpoint the current levels are not very favorable for opening new Long positions. Some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have been steadily pushing higher after the stock bottomed out back in March last year. There are few warning signs that a potential short-term correction might come first before the uptrend continues. The daily RSI has already pushed heavily into overbought territory and is currently sitting at 87, which is the highest RSI reading on the daily chart since 2018. This is rather bearish sign from a short-term standpoint, as it indicates that the price has already overextend its up move in the future, which in turn could bring back sellers and profit takers to put downward pressure on the price very soon. The reality is that a situation like that creates a very unfavorable risk-reward ratio for any new investors looking to get into the stock.

In addition to that, it is important to note the fact that the XLK and the Technology sector as a whole would continue to attract a lot of the investors’ attention moving forward, as technology is everything nowadays and the companies in this space are the ones shaping up our future. This makes us optimistic for the future performance of FNKO as the company is slowly evolving from a pure Consumer discretionary stock into more of a half discretionary, half-technology stock. Our analysis shows that as a result of the company’s involvement with the blockchain technology and the NFTs more specifically Funko has a phenomenal fundamental position to reap the benefits of this explosive industry growth. However, as a result of its relatively early stages of development as a technology company the stock brings relatively high levels of risk, which is portrayed in the 2.48 Beta for the stock. This mean that in the event of a correction, FNKO will drop on average 2.48 times more than the S&P 500 benchmark index. The same is also valid for the positive price movements as FNKO will significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we have never liked chasing stocks at their all-time highs regardless of how much we like the stock and the underlying business prospects, we would like to point out that starting a Long position at these levels would not be recommended, as the current risk-reward ratio is unfavorable. We would advise our followers to wait for a 5-10% pullback before initiating their first Long positions into the stock but to also be ready for adding more to their positions if there is a more meaningful pullback down towards the $15-17 zone. Our profit targets will be placed at $40 and $55 respectively. Any larger corrections on the stock down towards the $10-12 levels should be treated as strong buying opportunities.

Dow Theory 2.0 – Correlation Confirmation

Dow Experts’ approach has always been based on identifying the next great movement in the market by analyzing both the fundamentals and technicals as well as other all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis allows us to act in the market only if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement in the market is worth taking action for.

Therefore, in order to determine whether FNKO is a good stock to buy with respect to the current levels of the price we have decided to analyze the performance of both the SPY (Select Sector SPDR S&P 500 ETF Trust) and the XLK (Technology Select Sector SPDR Fund). The two ETFs share a very strong and positive 90% 10-year correlation, which would allow us to confirm some of the signals that we are getting with a great deal of certainty. The SPY is the largest, most liquid and most commonly traded ETF out there that invests in the 500 most well-capitalized companies in the US, and by doing so it mimics the performance of the S&P 500 benchmark index. Even though that unlike most of the other stocks that we recommend, FNKO is not a meaningful part of neither of these two ETFs, we are still seeing a certain degree of correlation between these three assets. Thus, we will investigate this correlation more closely in order to get more insight as to whether or not FNKO is a good buy now, or if it would be better to wait for a pullback first before jumping on the collectibles bandwagon. The stock is rather volatile and risky, but this should definitely not be taken as a negative for the stock, as the company is considered to be one of the most popular stocks among traders and investors at the moment and as a result of that its valuation metrics are not always the driving force behind the price movements on the stock.

By looking at the daily chart, one could see a very similar movement on all the SPY, XLK and the FNKO charts. Due to the coronavirus outbreak earlier in the year, the SPY made a 35% correction, dropping from its highs at $339 towards the key support at $221 where it found lots of buying interest, which ultimately led to one of the strongest rebounds in the history of the stock market as the SPY has appreciated with 62% in 5 months and 87% in 12 months. There has been a lot of speculation and discussion recently on how come the US stock market continues to rally when the US economy is barely trying to survive in the current COVID-19 environment. However, as we know the technical charts usually reflect the overall fundamental picture and the investors’ sentiment in the market. At the moment, the remarkable and relentless fiscal and monetary support provided by the government and the Fed is acting as a safe net for this highly overbought and overvalued market. The support will continue, but how much longer could the market continue to grow in this environment.

Similarly to FNKO and XLK, the SPY experienced a downward corrective movement in the last 2 weeks of February, 2021 that took the price down with around 3-5%. However, the uptrend resumed shortly thereafter. The ETF is currently sitting at the $408 mark after rebounding from the strong dynamic 20 DMA and 50 DMA support at $385, which also overlaps with another strong horizontal support positioned at $386. The correction back in February was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 10-12 months it was more than normal to see a downward corrective movement taking place at some point. We must also note that the main reason for the above-mentioned correction was the broad sector rotation that we saw in the market where capital was circling away from growth stock and into the cyclical and value oriented stocks out there. This made some of the largest tech and growth-oriented names vulnerable in the short term, which indeed resulted in a heavy decline in the broad XLK sector. While the XLK outpaced the SPY during the correction and dropped with 10.7% in just two weeks, the XLK has quickly managed to find its ground and now once again it’s outpacing the SPY but this time to the upside, which will bring all of the leading tech companies higher as well.

The recent failure of the price to break below the $385 support on the SPY as well as the $125 support on the XLK back in March and the subsequent sharp price appreciation could be taken as a signal for the presence of a strong bullish interest in the market as a whole. This in turn confirms that the long-term uptrend has resumed and that the current bullish run will most likely take the price to new all-time highs in the coming weeks. Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market.

We expect most of the big tech names as well as other market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLK will be one of the best performing sector ETFs in April. We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. We are bullish on XLK and SPY in the short term but remain cautios in our long-term projections. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have recently made a meaningful push higher after retracing from overbought conditions throughout March. The daily RSI has already pushed above 60, and it is slowly climbing towards overbought territory on the daily chart, which is a great short-term indication for the presence of a strong bullish momentum, but it is also a rather bearish sign from a long-term standpoint, as it indicates that the price will most likely overextend its up move in the future, which in turn could bring back sellers and profit takers to put downward pressure on the price.

In addition to that, it is important to note the fact that the XLK and the Technology sector as a whole would continue to attract a lot of the investors’ attention moving forward, as technology is everything nowadays and the companies in this space are the ones shaping up our future. This makes us optimistic for the future performance of XLK, SPY and FNKO as these investment vehicles are very closely correlated.

Acknowledging the fact that we have never liked chasing stocks and ETFs at their all-time highs regardless of how much we like the stock and the underlying business prospects, we would like to point out that starting a Long XLK or SPY position at these levels would not be recommended, as the current risk-reward ratio is unfavorable, due to the fact that both of the ETFs are sitting at their all-time high levels.

Sincerely,

Add a comment