Funko, Inc. $FNKO

The thesis

Funko, Inc., of Everett, Washington, makes licensed pop culture products: Pop! vinyl figures, action toys, plush, Loungefly bags and accessories, apparel and homewares (results release, 10-Q). About 41% of its sales in the first nine months of 2026 came from outside the United States, and it sources mainly from Vietnam, China and Cambodia (10-Q). Our case is that a company that lost $67.2M in the first nine months of 2025 is now profitable, generating cash and cutting debt, and that a large outside holder is adding while the board says it will keep evaluating strategic alternatives.

The evidence

Margins up, profit higher. Third-quarter gross margin was 45.2% against 40.2% (release). The 10-Q puts the lower cost of sales down mainly to product mix, plus favorable adjustments to the royalty audit reserve accrual, lower minimum guaranteed royalties and lower duty and tariff costs (10-Q). Operating income rose to $15.0M from $6.4M, and net income to $7.5M from $0.9M, $0.13 a diluted share against $0.02 (release). In the first nine months, net income attributable to Funko was $4.8M against a loss of $67.2M (release).

Sales growth outside the US. Sales rose 3.0% to $258.3M (release). Core Collectibles, led by core Pop! products, grew 4.8% to $210.1M, Europe 11.5% to $82.7M and other international markets 12.1% to $23.9M; US sales fell 2.4% to $151.7M and Loungefly fell 9.8% to $40.3M (10-Q). The company reiterated its 2026 outlook: sales flat to up 3%, gross margin of 46% to 47% and adjusted EBITDA of $100M to $110M, the last two including a $25.4M Q2 tariff-related benefit (release).

Debt coming down. Total debt, the term loan net of discounts plus the revolver and an equipment loan, was $195.9M at 30 September, against $241.0M a year earlier and $256.6M at 30 June 2025 (releases). Operating cash flow was $54.2M in the first nine months against -$33.2M a year earlier, capex was $24.8M, and $27.2M of term debt was repaid (10-Q). In February the lenders extended the loans to 31 December 2027 from 17 September 2026 (10-Q). Cash was $41.6M at 30 September (release).

A large outside holder adding. In its 13D amendment of 16 October, Fund 1 Investments reported 5,527,297 shares, 9.9%, and cash-settled swaps on 7,287,462 more, about 13.0%, up from 5,497,413 shares and swaps on 6,462,462 in its amendment of 22 September (13D/A). Director Charles Denson bought 72,992 shares at $6.85 on 24 August, about $500K (Form 4). The board intends to keep evaluating strategic alternatives from time to time, with no defined timeline (10-Q).

What the market is missing

The stock closed at $6.13 on 5 November, before the results call, a market value of about $346M on the 56,441,806 shares in the 10-Q cover (Yahoo Finance and Nasdaq, 10-Q). Adding $195.9M of debt and taking off $41.6M of cash gives about $500M, about 6 times the midpoint of the 2026 adjusted EBITDA guidance once the $25.4M Q2 tariff-related benefit is taken out (release). Free cash flow, operating cash flow less capex, was $29.4M in the first nine months (10-Q).

The risks

Nine-month net income was only $4.8M, part of the third-quarter margin gain came from royalty audit reserve adjustments and lower minimum guaranteed royalties, and the 2026 outlook includes the $25.4M Q2 tariff-related benefit (10-Q, release). US sales fell 2.4% and Loungefly 9.8%, and SG&A rose 8.9% to $86.9M (10-Q). The lenders waived the fixed charge coverage covenant for the quarters to December 2025, March 2026 and June 2026, and the loans mature on 31 December 2027 (10-Q). The 10-Q says disclosure controls were not effective because of material weaknesses still being remediated, and a $40.0M at-the-market share sale program is in place, with no sales through 30 September (10-Q). The CFO sold 61,024 shares between 7 August and 1 September under trading plans and to cover taxes, leaving none held directly, and the CEO sold 181,893 shares on 3 September to cover taxes on vested awards (Forms 4). The Chernin Group (TCG), which the 10-Q says has significant influence over the company, can designate two directors while it owns at least 20% of the Class A shares and one at 10% to 20% (10-Q).

What would change our mind

Another quarter of falling US sales, a gross margin that drops back toward 40% without the royalty audit reserve adjustments, total debt rising again, a covenant breach, or sales of stock under the at-the-market program.