- GoPro is targeting a niche market without a proprietary technology, thus resulting in minimum barriers to entry.
- Unpredictable growth patterns and stretched valuation can only be justified if the company grows at 100%.
- GoPro is for insiders to cash out. Don't be caught checking in.
The GoPro (NASDAQ:GPRO) IPO frenzy has swept over market headlines due to the surge in stock price. Since the IPO at $24, the company price has risen 100% from its offering, bringing the market cap to nearly $6B. Once investors look beyond the novelty of being a newly-listed company, they will realize GoPro's stretched valuation. At current levels, GoPro is not a good entry for new investors, rather a lucrative exit for those already holding shares.
Targeting a Niche Market Without Proprietary Technology
GoPro has built a strong brand equity around the extreme sport community and the action camera market. Though GoPro's HERO cameras represent a 45% share of the U.S. camcorder market (by dollars), this is a niche segment in a declining overall camcorder market.
GoPro's HERO captures quality images at high frame rates making it the leader in first person recording. Competitors have not yet been able to replicate GoPro's success due to quality and a distinguished brand. However, investors comparing GoPro to the exclusivity of revolutionary Apple products must remember that action cameras are not mass market products. They are used by a thrill-seeking group of people, therefore capping growth prospects.
Additionally, HERO cameras do not include some proprietary technology that acts as a barrier to entry. Competition will enter the market, which could erode GoPro's margins and dilute the brand equity. GoPro's gross margins already saw a 6% decline from 43% in 2012 to 37% in 2013. Established camcorder names like Samsung, Sony and JVC will up the competitive landscape in action cameras if this trend continues.
Unpredictable Growth Makes Already High Valuation Concerning
GoPro saw 87% in top line growth during 2013. Q1 2014 saw a decline in revenues from 2013 of 8%. As per GoPro, a delayed product launch caused the surprising Q1 sales figure. Highly volatile sales due to seasonality trends and a lack of guidance make forecasting GoPro's financials extremely difficult.
As seen above, even growing at double current figures would make GoPro valuation pricey. Though the company is profitable, a rarity in tech IPOs nowadays, profit margin is a mere 6% which greatly affects earnings multiples. At these current levels, the company is expected to grow triple digits, and anything less and the market will be disappointed. Once disappointment hits, I see GPRO falling just as fast as it rose. In my opinion, the future growth of GoPro does not warrant paying around 50x earnings.
Sell-Off Countdown: 181 Days
Beginning 181 days after the date of this prospectus, 107,945,976 shares will become eligible for sale in the public market, of which 10,043,042 shares will be freely tradable under Rule 144 and Rule 701, and 97,911,573 shares will be held by affiliates
December 23, 2014, is when the IPO lockup period expires. As seen with Twitter (down 18%), this date could be significant for GoPro holders looking to cash out. If the GoPro IPO date was any indication, in which CEO Woodman sold 3.56M shares for $85M, December could get ugly.
GoPro Investment: Smart for Cashing Out, Not Checking In
GoPro hype has caused the stock price to reach unjustifiable levels. The company targets a niche market with a technology that was once nearly obsolete. Valuation levels can only be warranted if the company grows at unrealistic levels. Investors looking to buy GPRO above $30 need to be reminded of the reality that companies go public so the early birds can cash out.