GoPro: Riding The Wave Of Experiential Consumption

Aug.26.14 | About: GoPro (GPRO)

Summary

Rise in “experiential consumption" globally will fuel product demand for GoPro.

The company has established a differentiated value-curve compared to its competitors. It is strengthening the value proposition for its consumer through innovative products.

Re-aligning the company into a media company creates significant strategic advantages in the long term.

After revolutionizing the camcorder market in the last few years, GoPro (NASDAQ:GPRO) leaped into the world of public companies after selling 17.8 million shares at $24 a share earlier this summer. Rising competition and a lack of clearly defined strategy to monetize user generated content has turned many into skeptics of the company. Understanding key demand drivers for action cameras and company's strategic initiatives will present a strong foundation for long-term investors in this company.

In my opinion, investors' fear of rising competition and uncertainty surrounding the transformation into a media company are unfounded. Analysis of the strategic direction the company has adopted to grow explains how these actions will lead to sustainable growth. By looking beyond its base of customers GoPro aggregated new demand for its products. It asked why enthusiasts had not taken up adventure sports as a sport yet, and found a key commonality uniting the mass of its non-customers. A majority of non-customers avoided adventure sports, implicitly accepting the difficulty and risk of the sport. This understanding gave GoPro valuable insight into how to create demand for its product. The answer was a miniaturized multifunctional and technologically advanced camera with hands-free ability to capture their experience. By incentivizing its base of professional athletes to record their experience, GoPro is now is motivating everyday folks to strap on a GoPro and capture their experiences in a unique way.

Building success as a media company

Complementing consumer participation to translate a complete experience into an unforgettable one will have a longer lasting effect than any conventional advertising campaign. GoPro filled a latent desire for consumers seeking a greater dose of adrenaline in their leisure and were turning to "extreme sports." GoPro has completely redefined the generational interest in adventure sports. An IDC report even stated, "Go anywhere active these days, whether it's the mountains of Vail or the scuba-diving depths of Honolulu's Hanauma Bay, and you're bound to see a GoPro. Kids these days' don't film their wave rides or half-pipe tricks. They GoPro them - strapping the US$200 to US$400 cameras to helmets, handlebars and surfboards. The cinema-grade, panoramic, point-of-view footage that comes out of a GoPro transforms mere mortals into human highlight reels."

To truly understand the growth prospects for GoPro, investors need to understand how an increased want for "experiential consumption" will reshape the consumer behavior. Consumer reaction against sedentarism is driving participation in sports, particularly endurance sports as a way to distinguish themselves from the herd. The popularity of obstacle races such as Tough Mudder highlights a broader trend toward functional fitness. Video sharing sites have helped not only to popularize these niche sporting categories but more importantly they are providing inspiration to novice participants and acting as a medium of practical instruction as well. Incentivizing professional athletes to earn a portion of the advertising revenue generated by views of their content reinforces a positive feedback loop.

User generated unique content could serve as a unique platform for advertisers to key in on the right consumer segment. Increased consumer interest in extreme sports also is driving strong growth for sports equipment such as bikes, surfboards and wetsuits, providing an excellent platform for sports equipment as well as sportswear companies to expand their reach. In addition, these sports enthusiasts represent a growing niche within the wider market for sports drinks, vitamin and dietary supplements and can help these brands expand their reach to the mainstream consumer.

GoPro's most direct competitor was Contour, a Seattle-based start-up which built cameras with functionality similar to GoPro's devices. After experiencing strong growth, the company succumbed to mounting pressure from GoPro's success and was shut down last year. Even though Sony (NYSE:SNE) also provides a wearable action camera product line, its products lack the pivoting lens like GoPro, which allows the image to remain upright. Perusing user reviews online suggests GoPro remains on top of the competition offering more versatility, reliability and quality.

Business Fundamentals

According to IDC, GoPro was responsible for 30.4% market share in total video camera sales and 4.1 million units sold in 2013 compared with 20.8% for No. 2 Sony. In the action camera category, GoPro leads the market with a total 47.5% market share compared to Sony's 6.5% share.

For the second quarter, the company reported revenue of $244.6 million, up 38% from the same period last year. Management contributed this outstanding revenue growth to increased demand for Hero 3+ Black edition as well as growing demand for accessory products. Notably, the company saw a 200% year-over-year increase in video views on YouTube, the quintessential driver to fuel viewership and product demand. On a non- GAAP basis, net income for FY14 second quarter was $11.8 million or $0.08 per diluted share, compared to a net loss of ($3.2) million or ($0.03) per diluted share in FY13. For the six months ended June 30th, 2014, gross profit dollars increased 36% over the same period last year, driven by 11% revenue growth and 2.5% decline in the cost of goods sold. Operating expenses rose by 70%, reflecting continued investments in R&D, Sales and Marketing. For the last twelve months, net cash provided by operations was $112 million, offset by capital expenses of $23 million. Results of management's take on monetizing the user generated content remain unknown, making discounted cash flow analysis quiet difficult in current circumstances.

Nonetheless, I continue to believe in the strategic decisions the company's management has made for generating long-term sustainable growth. In fact by pioneering its reach from consumers to non-consumers, GoPro has significantly differentiated its value curve from its competitors who still remain plagued with conventional market boundaries.

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.