Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Summary

  • GoPro witnesses a very successful public offering.
  • Questions arise over recent growth rates and the transition into a media/content company.
  • Valuation is quite high on earnings multiples after the first day jump.

GoPro (NASDAQ:GPRO) develops hardware cameras and related software allowing companies to capture, manage, share and enjoy video as well as photo content.

The company just witnessed a very successful public offering, boosting the valuation towards nearly $4 billion. The company's growth has been phenomenal in recent years, although confusion has arisen what the current real growth rate is.

This and the uncertain transition into a media company combined with a premium valuation makes me a bit cautious.

The Public Offering

GoPro sells mountable and wearable cameras and associated accessories to make quality videos under tough circumstances. The small, lightweight cameras are still affordable and are very popular with its customer base. GoPro's cameras range in price from $199.99 to $399.99.

GoPro launched its first HD camera in July of 2009, and has sold some 8.5 million HD cameras ever since in over a 100 countries, through roughly 25,000 stores. The company dominates a niche market, with research group NPD Group estimating that GoPro's HERO camera line held a 45% market share in the US camcorder market. Originally, the company was founded back in 2004 and shipped its first device in 2006.

GoPro sold 17.8 million shares for $24 apiece, thereby raising $427 million in gross proceeds. Note that half of the shares were offered by selling shareholders, while the other half will benefit the company.

Despite the very strong demand, GoPro and its underwriting syndicate did not raise the offering size. Shares were offered at the high end of the preliminary offering range of $21 to $24 per share. At that level shares were valued at roughly $2.95 billion.

Banks were eager to help out in bringing the company public. Included in the underwriting syndicate were big names like J.P. Morgan, Citigroup, Barclays, Allen & Company, and Stifel and Baird, among others.

Valuation

GoPro is focused on providing consumers with the best cameras, accessories and experience to capture, share and enjoy life experiences through both videos and photos.

The business started out focusing on active and passionate people, often sports people who like to share the thrill of a good run. Besides simply selling cameras, the company is forming a club of enthusiastic people surrounding its lifestyle brand. The strong fan base is the driver behind the company's ambitions to turn into a media company from its current state as a hardware player.

As discussed earlier, the company sold 8.5 million HD cameras since July of 2009, of which 3.8 million were sold in 2013 alone. The GoPro Studio software and app have been used or downloaded millions of time. Users are very active as well sharing these video on the internet's most popular outlets like Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), Youtube and Instagram.

The company has not yet monetized these streams, although it has reached an agreement with Microsoft's (NASDAQ:MSFT) Xbox to launch a channel while the company anticipates to start deriving revenues from a Youtube.com channel as well.

For the year of 2013, GoPro generated revenues of $985.7 million, which is up 87.4% compared to the year before. Hugely disappointing, gross margins are under significant pressure, falling by 6.5% to 36.7% of sales. The company managed to show operating leverage, reporting earnings of $60.6 million with earnings growth being in line with revenue growth. Note that revenue growth slowed down to still an impressive 54.4% in the final quarter of the year.

Revenues for the first quarter of 2014 came in at $235.7 million which is actually down 7.6% on the year before. Earnings more than halved to $11.0 million.

The company operates with $111.2 million in cash ahead of the offering, while having $110.7 million in debt outstanding. As such, the gross proceeds of roughly $213 million will result in a net cash position of nearly $200 million, valuing operating assets at roughly $3.7 billion around $31 per share. Note that proceeds will be used to retire debt, which costs the company merely 2.75% per annum currently.

This values operating assets at around 3.7 times sales and roughly 60 times last year's earnings.

Investment Thesis

As noted above, the public offering of GoPro has been a huge success. Shares were sold at the high end of the preliminary offering range and at its first day closing price of $31.34 trade about 39.3% above the midpoint of the preliminary offering range.

There are many risks related to this offering, including of course the valuation given the steep earnings multiple despite reasonable revenue multiples. GoPro's premium pricing compared to longtime competitors like Nikon (OTC:NINOF), Sony (NYSE:SNE), Samsung (OTC:SSNLF) and JVC (OTC:JVCZF) relies heavily on the brand name and a superior product after its competitors have neglected the market segment for years.

Besides potential competition, the reliance on key staff including of course its founder Nicholas Woodman is a key risk, as is the uncertain path of content development as well as product and brand concentration.

Another worrisome development at first sight was the reported 7.6% decline in first-quarter revenues compared to the first quarter in the year before. Note that the first quarter of 2013 was seasonally strong, as production of Hero3 Black edition devices were delayed in the fourth quarter, creating an artificial boost to first quarter results in 2013. Unfortunately the impact of this was not quantified by the company.

Despite the great success on the opening day, I am a bit worried about the valuation at 60 times last year's earnings. While earnings could increase in the year ahead multiples will most likely remain quite steep. The company reports net margins of about 6% on what is essentially a hardware company and the company has a huge way to go before making the transition into a media company in a highly uncertain path.

I remain cautious and watch this offering from the sidelines.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: GoPro - Caution As The IPO Hype Has Pushed Up The Valuation