Why Funko Inc. Stock Just Dropped 14%

What happened

It has "fun" built right into its name, but investors in toymaker Funko Inc. (NASDAQ: FNKO) aren't having a lot of that today watching their stock sink 14% as of noon EDT. Why are Funko shares dropping? No one seems 100% certain.

Management hasn't issued any press releases today, nor filed anything of interest with the Securities and Exchange Commission, either. No upgrades have been issued, nor downgrades -- nothing at all to explain the stock's sudden funk.

So what

If I had to pick one thing that's most likely to explain Funko's decision to resume obedience to the laws of gravity today, it would be this: So far this year, Funko shares are up 367%. While that's nice news for shareholders, I'm not 100% convinced that Funko stock is worth 367% more than it cost nine months ago.

Although technically "profitable," Funko generated no free cash flow (FCF) whatsoever in 2017, according to data from S&P Global Market Intelligence, and just $800,000 over the past 12 months. This means that for every $1 in GAAP "profit" the company claims to be earning, its actual cash profits have been more like $0.05.

Now what

Granted, Funko's stock price surge isn't entirely without reason. The company burned a lot of cash last year, and that's the main reason its trailing-12-month FCF is still so small. Over the first couple of quarters in 2018, it's generated respectable FCF tallies of $3.6 million in Q1 and $8.3 million in Q2. Run-rate that out, and Funko looks on course to generate nearly $24 million in cash profits this year.

Still, with a market cap of $1.3 billion, even $24 million in FCF will give this stock a very rich-sounding price-to-FCF ratio of 54. That's an ambitious valuation for a stock whose primary products look an awful lot like fads. I strongly suspect investors who are cashing in their Funko stock winnings today are making the right move.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.