GoPro's (NASDAQ:GPRO) numbers for Q4 and guidance for Q1 and full-year 2016 were particularly ugly, but we believe the valuation is attractive here and maintain that longs have favorable asymmetry in the next 12-18 month window. We expect share price appreciation in that time frame, but also are not calling a bottom on shares here as prevailing sentiment remains largely negative.
The action camera market is not being commoditized, and the data suggests that GPRO cameras have significant brand staying power. Throughout the CC, management cited NPD and GfK data points showing that GPRO unit market share is not only unaffected by the increasing number of competitors, but actually growing in spite of more competitive threats. In short, when you say action camera, you still think GPRO, and there are no signs that this is changing. As CEO Nick Woodman said on the CC:
While we respect our competitors the data shows they are not having any significant impact on our business.
We see the problem for GPRO as being the upgrade cycle. Successful product launches in 2014 jumpstarted huge Y/Y revenue growth numbers that sustained throughout the early part of 2015. Those growth rates slowed as 2015 cycled around and the company was comping against strong prior Y/Y revenue growth rates in 2H15. Guidance for 2016 implies revenue should be down Y/Y, despite a HERO 5 launch and growing market share. And this means that GPRO is having a tough time convincing its buyers to upgrade.
Simply, GPRO does not have an Apple (NASDAQ:AAPL) like upgrade cycle where consumers feel compelled to upgrade every cycle or year. This might be a function of the durability of GPRO cameras or a function of the fact that a GPRO camera gets much less usage over the course of a year than a smartphone.
In order to more appropriately address its TAM and create consistent upgrade buyers, the company is investing heavily in both its software and hardware. The company is investing in its software solutions to simplify the offloading, accessing and editing process, and commented that any advancements in software will be matched at the hardware level, with an emphasis on hardware being more mobile and cloud connected. We believe these are the right moves to be making and look forward to the launch of GoPro for Desktop and a new editing experience later this year. These investments will weigh on margins in the near term, but believe they are the proper investments in order for the company to focus on its long-term growth strategy of creating consistent upgrade buyers for its staple camera product.
Given the company's products have shown significant brand staying power in the face of competitive pressures and the current heavy R&D investments to deliver a more comprehensive product to the consumer, we assume GPRO can remain somewhat of a special camera brand into perpetuity. Under this assumption, we think it is not unreasonable to think this can be a $2.5 billion revenue/$250 million EBITDA business in five years. As is typical with a growing consumer electronics company, we see lower ASPs driving down gross margins and higher unit sales driving revenue growth. $2.5 billion in revenue by 2021 implies a 12% revenue CAGR from the midpoint of 2016 revenue guidance, and this seems reasonable to us given the trailing five-year revenue CAGR of 91%. Adjusted EBITDA margins, though compressing, were higher than 10% this year. Negative adjusted EBITDA guidance for Q1 is a reflection of heavy investment in software and hardware R&D as well as high marketing costs associated with a Super Bowl ad. As OpEx normalizes, we think GPRO can maintain long-term adjusted EBITDA margins around 10%.
This means we see GPRO as a $2.5 billion revenue and $250 million EBITDA business by 2021. The company is currently trading at a $9.78 quote, which equates to a $1.34 billion market cap. Striping out net cash of $474 million, and we see the stock is trading at a 4.8x EV/EBITDA multiple (adjusted). Assuming this bearish sentiment holds relatively constant throughout the next five years, that implies a 5x multiple on $250 million in 2021 EBITDA for a $1.25 billion EV in five years vs. today's EV of $866 million. That is good enough for 44% EV growth in five years. Market cap growth will include that 44% EV growth plus whatever excess cash growth the company generates in that time frame.
We do not think GPRO is a great investment here given the prevailing bearish sentiment, but we do think the asymmetry remains favorably skewed on the long side in the next 12-18 months. Our guess is that there will likely be one more good product/hype cycle later this year that will get investors out at a good return in the next 12-18 months. That hype cycle may come from the HERO 5, GoPro for Desktop, Karma or any combination of the three.
Disclosure: I am/we are long GPRO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.