Funko has taken the toy industry by storm

Company's stock up more than 40% this year

By PAUL R. LA MONICA, CNN BUSINESS
Frazer Harrison/Getty Images

(CNN) - Forget about Hasbro, Mattel and Lego. The hottest toy company just might be Funko, the maker of pop culture figures with heads that bobble.

You've probably seen (and maybe even own) one of the company's Pop! Vinyl figurines for Marvel superheroes, including Captain America and Thor. Funko also reproduces Star Wars characters like R2-D2 and C-3PO, Eleven from Netflix's Stranger Things, and even real life athletes from the NFL and NBA. They're popular with kids as well as serious collectors.

Fans love Funko toys. And so do investors.

The company reported sales growth of nearly 25% in the third quarter of 2018. Back in November, it also raised its revenue and profit outlook for the year.

Funko will report its results for the fourth quarter February 28. Analysts expect sales to have risen nearly 20% from a year ago and for earnings per share to have more than doubled.

Funko's stock is up more than 40% this year. But shares have been extremely volatile since Funko went public at a price of $12 in November 2017.

The stock plunged more than 40% on its first day of trading to about $7 because of concerns the company was a fad. But it rebounded, surging above $30 last September. Shares traded around $19 on Tuesday.

It looks like Funko is doing just fine. The company was founded in 1998 with what it describes as a focus "on low-tech, nostalgia-themed toys." There clearly is a market for it. Wall Street is predicting that sales will hit nearly $740 million in 2019, up about 15% from last year.

And now Funko is hoping to branch out further.

Piper Jaffray analyst Erinn Murphy thinks it will get a boost from new Pokémon toys this year thanks to the release of the "Pokémon Detective Pikachu" movie in May and the animated "Mewtwo Strikes Back: Evolution," which will be released in Japan in July.

Murphy wrote in a report that Funko has already had strong engagement on Instragram for posts about its toy for the Bulbasaur character. And she estimates that Pokémon toys could eventually pull in $50 million in annual sales for Funko, a level on par with how much it makes from Star Wars figures.

Funko has also started to make T-shirts, hoodies and other clothing, and it has a studio that produces short cartoons.

The hope is to sell even more Funko products to pop culture-obsessed kids and young adults.

Funko looking to diversify like other toy companies

With the studio, Funko is also taking a page from Hasbro and Lego, which both have had success with animated movies and TV shows.

Mattel is looking to branch out into entertainment too, having inked deals with Warner Bros. to produce Barbie and Hot Wheels movies. (Warner Bros., like CNN, is a part of AT&T-owned WarnerMedia.)

Funko also announced last week that it was buying board game maker Forrest-Pruzan Creative LLC, a company that has developed pop culture games centered on Disney villains, Harry Potter and even the late artist and TV host Bob Ross, who was famous for painting "happy little trees."

Funko president Andrew Perlmutter said in a press release that the acquisition lines up with the rest of the company's strategy.

"The games category is another avenue to deliver pop culture to our ever-growing fan base," he added.

The toy retail industry is in flux though, which could pose problems for Funko. Despite reporting a solid holiday a few weeks ago, Mattel shocked Wall Street on Friday with a warning of weak results for 2019, in part due to the bankruptcy of Toys "R" Us.

Still. Funko didn't have nearly the same level of exposure to Toys "R" Us as its larger toy rivals. Funko said in its most recent annual report that sales from Toys "R" Us accounted for just 3% of overall revenue, compared to nearly 10% for Mattel and Hasbro.

Instead, Funko relies more on specialty retailers such as GameStop and Hot Topic, mass-market retailers like Walmart and Target, and e-commerce sites — most notably Amazon.

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