Goldman Sachs Downgrades Funko On Valuation, Says Market Understands Toy Stock's Momentum

Projections of limited upside led Goldman Sachs to downgrade toymaker Funko Inc FNKO Monday. 

The Analyst

Goldman Sachs analyst Michael Ng downgraded Funko from Buy to Neutral with a 12-month price target lifted from $14 to $17.

The Thesis

In November 2017, Funko stock was added to Goldman's Americas Buy List. Since then, the company's stock is up nearly 80 percent versus competitors such as Hasbro, Inc. HAS and Mattel, Inc. MAT, Ng said in the downgrade note. 

"The outperformance was largely driven by FNKO’s better-than-expected top-line momentum,” the analyst said. 

Funko should continue to experience growth via the following catalysts, Ng said: 

• The infiltration of international markets. As a brand that advertises a product line with broad appeal, exposure to new, diverse markets should only improve the projected outlook. Most notably, the 2016 acquisition of Underground Toys should boost Funko's popularity and sales in Europe.
• Expansion in similar categories. Funko promotes other lines such as Mystery Minis, Dorbz, Pint Size Heroes and Rock Candy. The company further diversified with the addition of accessories and backpacks in 2017. Essentially, Funko has taken serious steps to expand beyond action figures and enter into many facets of this particular market, creating more opportunity for growth.
• A recent increase in pop culture and media consumption: both scripted original TV series and streaming TV series are on the rise, and increased consumption of the programming could lead to broader fan bases.

Despite the bullish catalysts, Ng said Funko's momentum is understood by the market, justifying the shift to a neutral stance. 

Price Action

Funko shares were set to close Monday's session down 2.73 percent at $15.67. 

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