GoPro: A Risky Pure Play With Unjustified Valuations

| About: GoPro (GPRO)

By George Zack

GoPro Inc. (NASDAQ:GPRO) was down 14.6% yesterday even after beating revenues and earnings estimates for the second quarter of its fiscal year 2014 (2QFY14). GoPro shareholders have been on a roller coaster ride, with the stock rallying more than 100% within four days of the IPO and it has been trading in the $36-$48 range ever since. The company is trading at a future price-to-earnings multiple (PE) of 53.14x and future price-to-sales multiples (PS) of 4.11.

Volatility in GoPro shares has been dubbed as above average by many analysts and the reasons are clear as crystal. The most apparent reason is confusion over the classification of GoPro as a company. While it may appear to be a simple consumer electronics company with a singular product line, the company insists that it is a media brand with plans to monetize its content sharing platform in the future.

The problem with categorizing GoPro as a media company is that all its revenues are currently being generated by the sales of its camcorders and related accessories. GoPro cannot be valued at the multiples of a media company unless ad revenues become a revenue stream for the company or at the very least, growth of this revenue stream can be estimated. The desire of GoPro's management to call the company a media brand has profound implications. Media companies tend to trade at higher multiples compared to consumer electronics companies. For example, Facebook Inc. (NASDAQ:FB) trades at a PE multiple of 44.8x while GoPro's competitor Nikon Corp. (OTCPK:NINOY) trades at multiple of 13.54x.

GoPro reported a net loss of $19.8 million, almost four times bigger than the net loss of $5.1 million in 2QFY13. Apart from this, investors are worried about GoPro's focus on a single product line. In case of a competitor offering a similar product at lower price in the future, GoPro's margins can take a hit and lead to depressed profits in the future. A case in point is that of Flip video cameras produced by Pure Digital Technologies that fell out of favor after enjoying a few years of success. Another competitive concern is smartphones eating into GoPro's market share by integrating better cameras going forward.

Another concern for GoPro's shareholders is the company's topline. While the company has shown close to 100% revenue growth in the last three years, revenue growth for 2014 and 2015 is expected to clock in at 24.4% and 22.8%, respectively.

Unless GoPro is able to show steady topline and bottom-line growth in the next few quarters, the company might see a rerating of multiples. Prudent investors should wait for valuations to normalize before taking a long position in the stock.

GoPro was down 14.6% in Friday's session. It is up 70% year to date and last traded at $40.97.

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Disclosure: No positions