Is GoPro (NASDAQ:GPRO) destined to make it big? The answer to that question does not depend on the company's performance so far, but on GPRO's business model and the niche market it operates in. With not enough innovation and only one product coming out every year, I can't think of a strong enough reason to justify the company's current valuation (despite of the recent drop in price). In order to justify my thesis let's have a detailed look at GoPro, soon to be GoHome maybe, if it doesn't diversify itself enough.
What Is GoPro?
GoPro's founder and CEO Nick Woodman, an action sports enthusiast himself, came up with the idea of forming a company, which produces cameras for self-recording videos during extreme action sports, such as surfing, skiing etc. Initial revenue growth was very impressive but lately the growth has slowed, as is evident from the Y/Y revenue growth of 263% in 2011, 125% in 2012, and 87% in 2013. While the company's revenues declined by 8% Y/Y in Q1 2014 primarily led by 11% decline in GoPro HERO shipments, in the most recent quarter sales grew again by 38%.
The gadget manufacturer had a 3-year CAGR of 142% (2010 to 2013), which Citi, GoPro's IPO underwriter, expects to drop to 34% from 2013 to 2016. In addition to the declining overall revenue, the business is not a very profitable one either. The company merely earned 6% in net margins in 2013. Moreover, the company isn't taking any aggressive measures to innovate and grow its target market.
GoPro has differentiated its product portfolio into three product categories: Black, Silver, and White. Among them the actual "HERO" for the company is GoPro HERO 3+ Black edition, contributing more than two-third towards the revenues. The Black edition, which costs the consumer $400, has the resolution of upto 4K for video purposes and 12 MP for taking photos and can take upto 30 frames per second. The Silver edition priced at $300 has the video resolution of upto 1080p60 and image resolution of 10MP. Finally, the GoPro HERO3 White edition introduced two years ago costs $200 and the features include video resolution of 1080p30 and image resolution of 5MP. Moreover, this low end model can take upto 3 frame per second. GPRO's product differentiation is in accordance with the company's guidance to differentiate itself through the content and experiences enabled by the hardware without compromising its core products quality.
GoPro An Instant Hit, But Is Growth Sustainable?
Nick came up with a unique idea and it was an instant hit, resulting in GoPro dominating the action camera market. The San Mateo, California based company has shipped more than 8.5 million HD cameras since launching them in (2009 to Q1 2014). GPRO, through its more than 25000 retail locations in over 100 countries, sold more than 3.8 million cameras in 2013 alone. The company in order to attract users and drive sales also exhibits the videos made from the GoPro cameras on these locations.
In order to survive in a highly competitive tech market in the long-run, GoPro needs to innovate and expand in different markets. Because of its shrewd targeting of masses who share their personal lives online through pictures and videos, the company has shown exceptional growth over the years. GoPro entered the market with a very impressive strategy and has uniquely differentiated itself from others by customizing its products. GoPro targeted a niche market at the beginning to gain a strong foothold in the market against competitors like Nikon (OTC:NINOF) and Cannon.
But in order to survive longer the time has come for GoPro to change its strategy, as the growth opportunity in the camcorder market has matured. Although GoPro makes some high end cameras and video software with some really impressive accessories, but honestly what's the point when the video cameras is merely a $2 billion industry and GoPro is already the dominant player. So you see there isn't much growth opportunity here. This leaves me thinking how much more the company can get from the market and at what cost?
Moreover, against the popular belief I don't really think that the company has come up with any hard to replicate technology or one that's going to completely revolutionize the market like products by Apple (NASDAQ:AAPL) or Tesla (NASDAQ:TSLA) did. The company doesn't offer an essential or a must-have sort of product. It doesn't have a widespread infrastructure either to offer any significant barrier to entry if any of the giants like Apple, Google (NASDAQ:GOOG), Nikon, and Sony (NYSE:SNE) etc. launch a competitive product. The company is still in the embryonic stages and its highly overvalued stock (which is usual for growth companies in early stages) could take a serious blow if any big player enters the market.
What GoPro Needs To Do For Long-Term
Going forward, I believe that the company needs to improve its features like battery life, image quality, and LCD Display in order to attract more users and expand itself into the consumer base who might not be interested only in the action sports. More than half of the GoPro customers are in their early twenties and among them more than 60% use their GoPro HERO while they engage in any action sport. The company's existing user base largely comprises of men. Moreover, a rather interesting factor about the company's user base is that the product is equally popular among all age groups despite the usually held belief that the action camera would only be used by the adults or teenagers in between 16-30. This fact also shows that the company can also expand itself among masses, beyond the action sport enthusiasts typically in their twenties.
Going forward, I believe that both the demographics and the uses of GoPro cameras would change, and should change, as the adoption of the camera spreads. Currently only 50% of the U.S. population has just heard of GoPro the company, let alone using its products. Moreover, nearly two-thirds of U.S. consumers have never seen GoPro content. However, those who have bought GoPro once have stayed loyal to the company and its product as is evident from the fact that more than 60% of the consumers use their device more than once a week and nearly one-third of GoPro users own two or more action cameras. Although these facts tell us that those who have used the camera have stayed loyal but it GoPro also has much room for growth.
GoPro As A Media Company
Lately, GoPro, the gadget company, is widely talked about as a media company and that it can leverage and monetize it's rapidly growing online community. The company in order to engage its users created a community of its users and the content created by them has gone viral online. This not only raised brand awareness, but also unleashed new possibilities on how the device could be used. Moreover, the company's GoPro channel on YouTube has more than 2 million subscribers, 800 curated videos and more than 500 million cumulative views on its videos while the "GoPro" search on the site generates more than 15 million results. In order to further enhance its user experience the company has also launched a GoPro App, which works both as a remote control device for the camera as well as a platform to manage and share content on-the-go, and a GoPro Studio, which is video editing software. I personally don't buy the idea of GoPro as a media company as the company isn't earning any revenues until now from all these efforts or its online presence. Moreover, all that discussion is based on the speculation that "if" the company starts monetizing and not on what the company is doing in reality or has guided to do in future.
Can GoPro Make BIG In Wearable?
Because of its wearable cameras, GoPro is also rumored to enter the wearable tech-product market, where it can leverage its brand name to gain the initial traction. Even if that is to be believed than the company has to face severe competition from the tech behemoths like Apple, Google etc., which have already launched (or planning to launch soon) their products and have a very strong underlying infrastructure to bear losses incase anything goes wrong. Moreover, they boast a significant user base of loyal consumers, which GoPro doesn't. I mean nearly two-thirds of American have not even seen GoPro content.
GPRO stock has surged more than 30% since its IPO nearly a month ago. The stock also showed some volatility recently as the company reported quarterly earnings and as the silent period ended, allowing the firm's IPO underwriters to publish their research reports on the wearable camera manufacturer giant.
I believe there is some serious optimism baked in the company's premium valuation. GoPro is trading at a significant 120.5 price/earnings, which would have been justifiable if the company had some impressive future growth plans such as new product launches, expansion into new markets both geographically and entirely different categories, and joint ventures etc. but GoPro is yet to convince the market in this regard. I do not see widespread adoption of action cameras by mainstream consumers and expect the company's shipments and revenue to continue to decelerate unless the company enters new markets, introduces new products, and attracts a wider user base.
While GoPro has initially clicked among masses but it won't last longer if the company doesn't innovate and diversifies itself enough. The company has some positives but it has already monetized them. GoPro is already trading at a significant premium valuation without any promising future or underlying potential. I wouldn't recommend buying into the hype and see the company's model and fundamentals in order to come at any decision.
Note: I started working on this article before the company released its earnings report. So some of the figures are taken from reports before the earnings release but it doesn't change my thesis and all the information is relevant nonetheless.
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.