GPRO Price data by YCharts
The company did not market itself in the roadshows as a firm that sells cheap cameras that are great for POV recording of stunts that most everyday people do not do; instead it described itself as a media platform. Marketing the consumer products aspect as the main driver of future profits would have made Wall Street less enthused. This is because it would have been deemed a bad business model by investors because of the fact that once you sell camera to a customer, you have made most of the profits that you will ever make off him/her. The consumer products business that they are in is clearly not a great business because it would take huge innovation in the category for a consumer to buy a new camera. Once the market is penetrated fully, the growth in the business will inevitably decline. The company can make overly optimistic comparisons about its potential GoPro sales to the sales of iPods all day long, but this would not give the company the hype that it has today. The hype comes from the possible monetization of content. Therefore, this is the part of the business that I will be analyzing in this article.
The company has been described as "not like other hyped Internet companies" because it turns a profit. Its profits come from the sales of the products, not from the media division, so it is actually very similar to the other richly valued Internet/social media firms. In fact there has been 0 revenue generated from the content creation. It is difficult to value companies that have 0 profits, but this does not mean that they have 0 worth. I am going to compare AwesomenessTV to the valuation of the content part of GoPro's business. With this valuation at hand, you can do your own research on what the consumer products part of the business is worth in order to determine whether the stock as a whole is overvalued or undervalued.
I figured that AwesomenessTV would be a good company to compare the media part of the GoPro business to because it was bought 1 year ago; hence, the valuation is known. On May 1st of 2013, DreamWorks Animation (NASDAQ:DWA) purchased AwesomenessTV for $33 million with the possibility of the price increasing to $117 million by 2015 if certain metrics were met. I am going to compare some of the content numbers from the channel in 2013 to the current GoPro YouTube channel. First I would like to mention the complete nonsense that is their claim that having 1 billion views with GoPro in the title of a video means that it's a media company. The company also adds that there are many videos that were recorded with GoPro cameras that do not have the firm's name in the title. It is great marketing for the company for users to be promoting the firm's products on YouTube, but this is the furthest extent that the claims should go to. There is absolutely no way for GoPro to monetize every video that is shot with their cameras. This would be akin to Cannon claiming that they are a media company because millions of videos were shot with their devices. I understand that GoPro videos are unique, but this does not give the company access to their users' videos to profit off of. The videos on the company's channel are the only ways that the company can make advertisement profits off of content shot on GoPros. Why would users allow great content that could be monetized, to be used by GoPro for no cost? If the content is valuable, then it will not be free to GoPro, even if the videos were shot with their devices. I will reiterate that I believe the products will do well under this scenario; I am simply refuting the company's claim that it is a media company.
Now I will delve into the specific numerical comparisons for the entities. AwesomenessTV is a multichannel network that gets YouTubers to sign on to it. In 2013, when the company was valued at $33 million, it had 55,000 channels, 14 million subscribers, and 800 million video views. This is an enormous amount of content. Based on amount content and video views this is a very low valuation compared to GoPro. GoPro currently has 5 channels, 2.2 million subscribers, and 537 million total channel views. GoPro is currently being valued at $5.8 billion. While its profits do come from the consumer products that it sells, it seems as though the optimism that has led the company to gain about 80% from its IPO is coming from the buzz surrounding its potential media business. The company has gained $2.8 billion in market share from its IPO. Further evidence that GoPro is overvalued is the fact that AwesomenessTV had revenues last quarter of $4.1 million and a gross loss of 80 thousand dollars. It is currently an unprofitable entity even with the prowess of DreamWorks! The current statistics on AwesomenessTV dwarf that of GoPro, even if you include every single video with the GoPro name on it. As of today, AwesomenessTV has 86,000 channels, 5 billion total views, and 50 million subscribers. If the high end of the range is taken from the acquisition last year than the company is worth $117 million to DreamWorks. AmsomenessTV is a company that far exceeds GoPro's video metrics on YouTube and is currently unprofitable, yet it is valued significantly less than GoPro. The fact that the firm was acquired for $117 million clearly is evidence that the recent $2.8 billion increase in the market cap of GoPro is way too much. To be fair and balanced, I will mention that GoPro has 7 million likes on Facebook (NASDAQ:FB) compared to AwesomenessTV's 144,000 likes. This shows the power of the GoPro brand. I simply believe that this brand power is way overvalued.
The investment plan is obvious for GoPro. Do not buy the stock; it will lose you money in the next 12 months. Currently I would recommend shorting the stock. When options become available I would certainly recommend buying puts. I am actually interested in DreamWorks stock, but I will leave that for another article.
One short term risk to this advice would be the opportunity cost that would occur if the stock continued to rise. It may have a good month like Twitter (NYSE:TWTR) did when its stock increased after the IPO because momentum driven traders bought into it.
TWTR data by YCharts
One long term risk to this thesis would be that the company sells so many cameras and accessories that the media segment's overvaluation doesn't matter. A second risk would be that GoPro turns into a combination of Netflix (NASDAQ:NFLX) and YouTube. This combination would be a platform for content that is free for the company to use and allows it to make profits by selling advertising.
Disclosure: The author is short GPRO. 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.