By Sam Boughedda
Shares of Funko (NASDAQ:FNKO) jumped more than 7% in early Thursday trading after JPMorgan analyst Megan Alexander upgraded the stock to Overweight from Neutral, increasing the price target to $28 from $22.
Alexander based the upgrade of the stock on four key reasons.
"We are upgrading FNKO to Overweight and raising our Dec 22 PT to $28 based on: (1) expected upside to Street 2022 revenue estimates (and the roll to 2023) given the strong content rebound with FNKO's stable of evergreen properties (~67% of sales in 2021) providing a consistent ballast to the business; (2) the margin outlook flipping to positive from negative over the balance of the year with expansion expected in 2023; (3) the toy category's resilience in recessionary periods, along with FNKO's even lower price points (<$12) allowing it to be a 'guilty pleasure' for parents and 'fans' even during times of economic distress; and (4) attractive valuation," wrote the analyst. "FNKO is trading at ~10x P/E and ~5.5x EV/EBITDA on our 2023 estimates, which compares to larger toy peers trading, on average, at ~15x and ~8x, respectively, despite FNKO's higher topline growth expectations."
JPMorgan believes toy demand remains strong, with Target (NYSE:TGT) and Costco (NASDAQ:COST) calling out the category. In addition, when conducting research, a call with toy expert Lutz Muller revealed that his data shows "April and May POS growth of 40% for FNKO with broad-based strength across geographies and categories."
"Our December 2022 PT of $28 is based on 13x P/E and ~7.5x EV/EBITDA on our FY23 estimates, still conservatively below peers but in-line with its historical valuation on an EV/EBITDA basis. This represents 33% upside," added Alexander.