Originally, traders bid the stock up with the expectation GoPro would build a media company with original content created with GoPro camcorders. You probably remember the catch phrase "content is king" back in the late 90's. Unfortunately, it couldn't supplant the 800 pound gorilla in the space, Alphabet's (GOOG) YouTube. Although GoPro has a very successful channel on YouTube, it doesn't generate enough revenues to command the lofty valuation it once did.
The stock got as high as $100 during its first few months of trading, only to come crashing down to $28, roughly $4 above the IPO price of $24. Almost a round trip ticket.
Examine the chart below:
Source: Stock Charts
The extreme decline in share value may be a tantalizing entry point for some investors, especially if they're familiar with GoPro's products. However, there's a 30% short float on the equity, so many traders believe the stock has more room to go to the downside.
I've read arguments that there is potential for quick profits for GoPro bulls with the advent of a short squeeze, and this may be true, but not at this juncture in my opinion. I tend to side with the shorts and think that although there is a future for this company, whether as a stand alone entity or part of a larger conglomerate, the next quarter will be tepid. The next earnings call is scheduled for October 28th, and I'm waiting for company results at this time before I put any money to work, if at all.
Short Term Bear Thesis
- High Definition semiconductor manufacturer Ambarella (AMBA) warned that Q3 would be flat in their last conference call. Ambarella is GoPro's primary chip supplier. Although this news caused GoPro to sell off significantly, the damage may not be done.
- No wide moat. Although GoPro has great brand recognition in the United States and is doing well internationally, in China it's rival Xiaomi that may have a leg up. Not only are Xiaomi camcorders significantly less expensive than GoPro's products, but there's that old adage "charity begins at home". There's no guarantee GoPro's Hero series of action cameras will supplant Xiaomi products in Asia.
- Oversaturation. GoPro has been around for years. Those that want the cameras probably already own them. Although they make for great stocking stuffers, that's a Q4 phenomenon.
- Smartphone cameras are improving. Although you don't want to take your iPhone or Android device scuba diving, the quality of still and motion pictures on smartphones is improving which may temper sales to mainstream buyers. As an example, the recently released Session model aimed at mainstream users was met with tepid reception, resulting in GoPro reducing the price by $100.
- Government regulation. Quadcopter is GoPro's foray into the drone market, and is scheduled to be released in the first half of 2016. Wall Street is a forward looking mechanism and potential sales of Quadcopter may be buoying current share price of $28. I think the drone market will be regulated in the near term, and may put pressure on sales, which in turn will decrease earnings.
- Virtual reality is an evolution, not a revolution. Odyssey, GoPro's 16 camera array that captures action in 360 degrees will surely be a hit, but not until VR technology becomes more suitable for the mass market. As is, we're still in the pioneering phase of VR rollout. Odyssey will not contribute meaningfully to the top or bottom lines for a few years.
- Analyst downgrades. Piper Jaffray recently cut GoPro's price target from $54 to $25. More brokerage firms may follow suit as the company's financial niche transitions from entertainment entity to hardware manufacturer. Valuation metrics should be in the same ballpark as a Garmin (GRMN) or an Apple (AAPL).
Long Term Bull Thesis
- Quality. GoPro cameras are the best products on the market. The editing software is improving, too.
- Brand recognition. GoPro cameras are synonymous with "must have" with the Millennials. This is true both domestically and in Europe. If they command a certain cachet in Asia, this could propel revenues to the upside.
- Expanding markets. If drone technology doesn't get regulated to extreme levels, and Virtual Reality becomes more user friendly, GoPro will have additional revenue streams to build on.
- Great distribution. Over 40,000 retail outlets sell GoPro camera. If you want to buy one, there shouldn't be a problem.
- Well run company. GoPro is profitable and has very little debt.
Valuation
The sentiment on Wall Street has soured on GoPro because it is no longer considered a media company. Analysts are valuing it as a hardware stock now. Let's compare some statistics between GoPro and Apple, another hardware company and see how it stacks up.
| GoPro | Apple | |
| Price/Sales | 2.23 | 2.84 |
| Price/Book | 4.84 | 5.08 |
| Return on Equity | 41.58% | 41.15% |
| Estimated earnings growth this year | 28.80% | 41.60% |
| Trailing P/E | 25.53 | 12.84 |
| Estimated earnings growth next year | 15.30% | 7.30% |
| Forward P/E | 14.55 | 11.33 |
| Dividend | 0% | 1.86% |
Source: Yahoo! Finance
The two stocks appear to be evenly matched in Price/Sales, Price/Book and Return on Equity. It's when we get to earnings growth and forward P/E Ratios that GoPro seems to be slightly overvalued compared to Apple. Plus, Apple pays a healthy dividend for a Silicon Valley corporation. I believe Q3 will be a tough one for GoPro, and analyst estimates may come down, especially impacting the forward P/E Ratio.
Strategy
I'm a value investor by principal and prefer to purchase my stocks at discounted rates. GoPro doesn't meet that criteria yet. All bets will be off if they report a killer quarter on October 28th, but I'm positioning my bid as a price in the low $20 range, below the original IPO price of $24. I will not chase a stock like GoPro. If I do happen to catch my price, I wouldn't hold my position much past Q4 which is traditionally a strong quarter because of the holidays.