GoPro: Not Perfect, But Better

About: GoPro (GPRO), Includes: GRMN
by: Stone Fox Capital

GoPro reported strong Q3 results, but disappointed with Q4 guidance.

The action-camera company has streamlined operations to improve results at a lower revenue base.

The stock valuation is appealing considering the turnaround is in place.

GoPro (GPRO) ended last week with a thud as the market was disappointed with growth projections of the action-camera company. The company though continues to support our previous research of a successful turnaround under appreciated by the market.

The stock is now trading back below $9 sending the market valuation to only $1.3 billion. The Q3 results clearly weren't perfect, but did GoPro do enough to ensure a strong future for shareholders?

GoPro smashed Q3 estimates beating revenues estimates by nearly $17 million and growing 37% from last year. The unfortunate outcome of beating estimates by a wide margin was pulling revenues forward into the quarter causing a partial contribution to the Q4 guidance miss.

The market focused on Q4 guidance at $470 million that was roughly $50 million short of the analyst estimates above $520 million. A portion of the weakness can be attributed to the Q3 beat, but investors need to consider that the new GoPro guides conservatively in part by maintaining leaner inventories.

Looking at the earnings data, GoPro has beaten quarterly results this year by $10.7 million, $27.0 million, and $16.7 million. Throw in at least a $15.0 million beat for Q4 and the action-camera company gets close to the original expectations for the 2H of the year.

The company might not meet that original target, but the better financials are the key to the long-term story. GoPro has significantly cut operating expenses limiting the need to make irrational decisions like selling the Karma drone at low margins and push inventory into the retail channel.

The company expects operating expenses to dip below $500 million. This expense level allows GoPro to turn very profitable next year on sales of $1.4 billion and gross margins of 40%.

Inventory is lean at 8 or 9 weeks, down from levels that reached 14 last year. A good sign that inventories are under control now is that GoPro is heading into the holiday season with $177 million on the balance sheet compared to $167 million exiting the holiday period. The later required promotions while the former should allow the company to focus on select initiatives to meet corporate goals as opposed to pushing product on consumers to clear inventory.

GoPro even appears to have wrongly anticipated demand for the HERO5 and the Session low-end products. Regardless, the company has overcome some of the hiccups to produce a Q3 profit and possibly one for 2017.

For these reasons, GoPro appears better positioned to get the market right with a low-end product in 2018 and generally succeed with normal execution and possibly thrive on perfect execution going forward.

For this reason, a comparison to Garmin (GRMN) appears reasonable. The consumer products company has turned niche products into an $11 billion market value. The stock now trades at 3.5x the P/S ratio of GoPro showing the potential upside if the latter can generate consistent profits.

Chart GPRO PS Ratio (Forward 1y) data by YCharts

The key investor takeaway is that GoPro won't stay below $9 for long as the company turns profitable again. The more consistent product development with HERO6, Karma, and Fusion sets the company up for success while the stock trades at depressed levels.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GPRO over the next 72 hours. 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.