GoPro - Current Risk-Reward Remains Unattractive

Aug. 4.14 | About: GoPro (GPRO)


GoPro releases its first quarterly earnings report as a publicly traded company.

Despite a modest beat and solid guidance, investors are taking some profits after recent strong momentum.

GoPro has a lot to prove at this valuation, I don't believe the current risk-reward opportunity is compelling.

GoPro (NASDAQ:GPRO) released its second quarter results on Thursday following the market close. It's the first quarterly earnings release as a publicly traded company.

The company reported a big GAAP loss due to costs related to the public offering which is no real surprise. The third quarter outlook seems fair, yet the current valuation, the reliance on essentially one product and key staff, creates too much risk for me considering the potential rewards.

Second Quarter Results

Revenues came in at $244.6 million, a 38.1% improvement compared to a year ago, while sales were up just 3.8% on a sequential basis. Despite the modest sequential growth, revenues came in ahead of consensus estimates at $238 million.

Despite the popularity of its products and the rapid growth, the company was forced to report a GAAP loss of $19.8 million. This compared to a much more modest $5.1 million loss a year ago and reported earnings of $8.5 million in the first quarter.

In its press release GoPro is very keen to use non-GAAP earnings metrics, reporting earnings of $11.8 million, or $0.08 per share on that metric for the quarter. Earnings came in ahead of consensus estimates which stood at six cents per share.

Looking Into The Quarter

While year-on-year sales growth was impressive, sequential trends have been less impressive.

The company posted gross margins of 42.1% for the quarter, up 120 basis points compared to the previous quarter. Margins were up exactly 10 percent points compared to last year.

Operating losses came in at 6.8% of sales which compared to operating earnings of 7.0% in the first quarter. The large increase in operating costs resulted from general and administrative expenses which rose from just $9.9 million in the first quarter to $41.2 million over the past quarter. Of course a large portion, although not specified, has to do with expenses related to the public offering on the Nasdaq share market.

As The Third Quarter Outlook Provides Comfort

For the current third quarter, GoPro anticipates revenues to increase towards $255-$265 million, suggesting 6.3% growth on a sequential basis at the midpoint of the guidance.

Assuming similar gross margins as the second quarter, gross profits could come in around $109 million. The company's CFO Lazar predicted operating expenses to fall back to $92.5-$95 million which would translate into operating earnings of about $15 million and could result in GAAP earnings of $0.06-$0.08 per share.


At the moment, GoPro has access to roughly $105 million in cash and equivalents. This is as its total debt nears $108 million, resulting in what is essentially a flat net cash position. Furthermore, the company has $77 million in convertible preferred stock outstanding.

It should be noted that the $201 million in net proceeds following the public offering were received after the end of the quarter, and therefore are not included in this overview.

With nearly 83 million shares outstanding following its public offering GoPro is valued at $3.4 billion with shares trading at around $41 per share. Given the modest net cash position after factoring in the dilutive effect of potential convertible preferred stock, operating assets are valued at around $3.3 billion. While this does not result in a crazy sales multiple, the company has little earnings to show for at the moment.

A Very Successful Debut, But What Is Next?

GoPro's public offering which took place in at the end of June was well-timed and one of the hottest offerings so far this year. The company and underwriters decided to sell shares at the high end of the $21-$24 preliminary offering range, perhaps deliberately underpricing shares given the strong demand.

As such shares saw a big healthy opening day pop, ending the first trading day in their mid-thirties. A few days later shares traded just a few cents away from the $50 mark. While shares have seen a retreat from those levels, trading over the past month has been relatively stable with shares trading in a $40-$50 range.

Given the disappointing take by the market on the latest numbers, shares now trade near the low end of that range.

Final Takeaway

Of course GoPro's cameras have been the hottest thing in town, selling at premium prices of up to $400 per camera. This is quite pricey given the continued disinflation in hardware prices and the improved photographic capabilities of smart phones.

This is the reason why the company is so keen to create a "cult" group of athletes and active people around its cameras and brand. The company hopes to turn itself into a media company, creating a platform to share the best videos, thereby making it hard for competitors to solely compete on hardware prices and capabilities.

As such the company, and its high-profile executive and founder Nich Woodman stress the social media results, as an indication of the company's progress of turning into a media company with a strong ecosystem. This includes 2 million channel subscribers to the company's YouTube channel, backed by the shipments of its cameras crossing the 10 million mark. Besides having 200% growth in views on on a year-on-year comparison it has been active with its own channel on Microsoft's (NASDAQ:MSFT) Xbox, among other initiatives.

Following the company's public offering back at the end of June, I last checked out GoPro's prospects. I urged for caution as the public offering hype has pushed up the valuation a lot. In essence the company relies heavily on a narrow product category and key staff, which is not completely uncommon in a start-up. Yet the overall steep valuation for what essentially is a hardware company into a transition of a "media" company left little opportunity for decent risk-reward in my eyes.

While the company will make incremental improvements going forwards, I am not so much impressed with the growth rate given the low profitability of the business which is expected to return to GAAP profitability in the third quarter. Given the current billion run rate in sales, I would like to see earnings of at least $100-$200 million before potentially getting interested at current levels or slightly below.

As such a scenario is not unfolding, the risks outweigh the rewards in my eyes, making it easy for myself to continue to avoid the shares.

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.