GoPro Is Fundamentally Overvalued, But May Still Have Room To Run

| About: GoPro (GPRO)


Shares sold by the CEO shouldn't be a concern.

GPRO's P/E is sky-high, but not a huge concern.

The million-dollar question: Can they monetize content?

GoPro (GPRO) has certainly had quite the IPO. The company, known for its durable, versatile camera equipment is pp over 60 percent since last Thursday for individual investors. It doubled from its IPO price of $24 for over a 100 percent return for underwriters such as JPMorgan (NYSE:JPM), Barclays (NYSE:BCS) and Citigroup (NYSE:C) in just 4 short trading days. Personally I've been waiting for this IPO for a while, setting a Google Alert for "Woodman Labs IPO" at the beginning of 2013, so needless to say, when the time came, I bought in to the fury and held on for dear life. The relatively young investor in me was thrilled as I watched 15-20% returns day in and day out. But my old, risk-adverse soul screamed at me to lock in my gains and not get greedy. So what is a conflicted investor to do but take a closer look? Here's what I've found:

Fundamentally, GoPro is vastly overpriced.

According to the companies prospectus, EPS for 2013 was $0.47 a share which would mean as of close of trading on July 1, the company's price/earning ratio is 103.83. For comparison purposes, Nikon (OTC:NINOF) has a P/E of 13.6, Apple (AAPL) has a P/E of 15.64, and Google (GOOG, GOOGL) has a P/E of 31.64. Facebook (FB) (an example of another popular IPO) however, did have astronomical P/E ratios starting out, although it recently settled around the low 80s. Granted, for IPO companies, P/E is a poor measure of a company's stock performance since much of the speculation revolves around future earning capabilities and less about past performance. As noted by many news outlets though, GoPro is already making a solid profit off of its cameras, which puts it ahead of quite a few popular IPOs in the past couple of years. The company booked $60 M in net income last year on almost a billion dollars worth of sales. This makes for a profit margin of about 6.1% in 2013, nowhere near as good as Apple's 21.7% last year but better than Nikon's 4.8% or Panasonic who lost about $754 M last year. Panasonic and Nikon both offer competing products for GoPro's cameras.

Everyone is worried about GoPro's ability to monetize its content.

Which I get. Over time, companies lose their first mover edge, competitors creep on market share and the profit margin on hardware plummets. GoPro seems hellbent on bending their future away from this path though. Engadget did an excellent post about a month ago now detailing the companies move from hardware owner to content provider. They're off to a great start. The company has more than 7.4 M "likes" on Facebook. That's over 3 times as many likes as Chipotle (NYSE:CMG) or Oakley. Their social media footprint is vast. This quote was pulled from page 92 of their prospectus:

In 2013, our customers uploaded to YouTube approximately 2.8 years' worth of video featuring 'GoPro' in the title. Also on YouTube, in the first quarter of 2014, there was an average of 6,000 daily uploads and more than 1.0 billion views representing over 50.0 million watched hours of videos with 'GoPro' in the title, filename, tags or description.

And this one from page 97 in reference to it's marketing strategy:

GoPro has established marketing relationships with more than 120 athletes, celebrities and entertainers, and sponsors more than 90 sporting events annually, including the X Games, Supercross and ASP world surfing championship events. We partner with athletes such as Olympic gold medal winning snowboarder Shaun White and 11-time world champion surfer Kelly Slater, as well as entertainers, such as Foo Fighters, Jane's Addiction, Guy Fieri and Alton Brown, and producers of popular television shows.

The following is there, with 2 million subscribers to its YouTube channel, and millions of cameras waiting to upload something, GoPro is always on the verge of the next great viral video. The uptrend in both their marketing and research and development suggests they're trying to find away to bank on their widespread content success.

Much has been made of the CEO's sale of stock.

Normally I'd agree with all the concern, but for a newly minted billionaire who is still under 40, I'm going to take a pass on the criticism. Nick Woodman and his wife, Jill, sold about 3.6 million shares according to reports. According to the prospectus, they owned a combined 56 M shares so this represents a mere 6.4 percent of their holdings. Who can blame them? If I just made a billion dollars on paper I'd like to take out a small percent of my new fortune as well. For comparison Mark Zuckerberg owned 1.075 billion shares before Facebook's IPO and sold almost 140 million during the offering, which represented 13 percent. (Pg 141 of FB prospectus)

An October 2013 acquisition may be a harbinger of future innovation.

Lastly, in October 2013, GoPro acquired long time partner, website and software developer, General Things, Inc. According to a press release, General Things "has been instrumental in helping the company advance its business backend and consumer-facing web development." Furthermore, they were listed in Inc.'s list of 500 fastest growing companies. Prior to acquisition, General Things' mandate was "to continually build excellent products, from interactive sites and mobile applications, to advanced e-commerce systems and software for custom embedded and low-power devices." They also partnered with Nike (NYSE:NKE) and National Geographic. This acquisition is primed to help GoPro continue to innovate in it's software design space and will help create longer lasting battery life for their seemingly indestructible cameras.

So, will I continue to hold on to my GoPro shares? Probably, or at least until the lockout period expires on December 23rd. Until then though, I'll be keeping a very close eye on this very exciting company.

Prospectus information obtained from GoPro's Prospectus filing according to rule 424(b) here.

Disclosure: The author is long GPRO, with a position small enough that it's not material to the author's portfolio. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.