GoPro Offers Incredible Value Heading Into A Profitable 2019

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Includes: GPRO
by: Napoleon Capital
Summary

GoPro has certainly had it's struggles over the past several years, including a poorly thought out expansion into the drone market.

Management has refocused on the core product and consumer, and strong 4th quarter results suggest it is paying off.

GoPro remains the dominant player in the action camera market, a market expected to grow by 13% CAGR.

With a great outlook for 2019, shares look attractively priced.

I find it daunting to invest in a stock that is down about 85% since IPO and 40% in the past two years. However, I believe management at GoPro (GPRO) have learned from their previous mistakes, and have a good plan for the future.

Improving operating metrics, a growing action camera market, and a net cash balance sheet all bode well for the future of the company.

The Past

GPRO has been a disappointment for any long term shareholders, as the shares are currently going for $5.32 compared to $60 in 2015 and $8-10 in 2017.

Chart
Data by YCharts

Most of the problems are the result of GoPro over reaching, trying to go after the mass market instead of it's core customers. They thought the market for their product would be much larger than it ended up being, and they over expanded. They also failed miserably at an attempt to enter the drone market in 2016, which they ultimately pulled out of. Their drones weren't differentiated from their larger competitors, and GoPro's existing customers just didn't have enough demand for drones to support the expansion.

The Present

Although a massive mistake, management quit the drone business and committed to focusing on the core audience who generate the demand for GoPro's action cameras. This is clear from the comments CEO Nicholas Woodman made in the most recent earnings call.

So rather than trying to spread our marketing dollars too thin to try to reach and relate to everyone, we are more focused on better understanding the customers that are encountering problems that GoPro serves as a solution for, and better addressing those customer segments both with our products and with our marketing messages so that we can do a more effective job at educating them and converting them into paying customers.

They have reduced the amount of employees from 1,500 in Q4 2016 to 900 as of the most recent quarter. Operating expenses have nearly halved over that time.

Go Pro Revenue Figures Source: Q4 2018 Presentation

At the same time, revenue has recently picked, thanks in part to the launch of the HERO7 Black. The key here is that the reduction in spending hasn't diminished sales or demand for their product.

Just as important, GoPro still dominates in action camera marketshare:

Region Market Share by Units Market Share by Dollar Amount
United States 87% 97%

Europe

91% 90%

Japan

57% N/A

Thailand

88% 91%

Korea

36% 53%

Data Source

Asia has been an important growth market. Dollar market share in Korea is up 8% year-over-year, and sell through dollars in Thailand is up 150% YOY.

The Future

The Q4 results were strong, but what gives me confidence is the forecast for 2019. Management guides for Revenue growth of 5-8%, a margin of 38%, and positive E.P.S. in the range of 20-40 cents. If GPRO can hit analyst estimates of 26 cents per share that gives it a forward P/E of 20. 40 cents of net cash per share makes the valuation even better.

Focusing marketing efforts on core customers, as well as improved inventory management are going to continue to benefit the company over the next several years.

In addition, the outlook for the global action camera market is strong, expected to grow at 13% compounded annually through 2023.

Action Camera Market Growth

With a dominant market share, GPRO stands to be the main benefactor of the growth.

I also appreciate the other growth segments for outside of action cameras:

  • First, they have a growing subscription program called GoPro Plus. It provides subscribers free replacements for all broken cameras, unlimited cloud storage, and discounts on camera accessories. Although still small with only 200,000 subscribers, it has grown 50% over the past year and likely has even more room to grow. GoPro Plus is everything the drone expansion wasn't. It is low risk, adds value to their existing customers, and protects market share by giving users more reason to stay with GoPro next time they upgrade their camera.
  • They recently entered the 360 degree camera market with the Fusion camera. Instead of going after the industrial market for 3D cameras, or any other distraction, they are integrating the technology into their existing product line. It shows they are serious when they say they're focused on the action camera business.

These growth initiatives show that they are increasing revenue streams and expanding their offering in a way that synergizes with their existing business, instead of distracting from it like the drone disaster.

I'll suggest one last consideration. The small market cap and net cash position, combined with a dominance of their market, makes GPRO a good acquisition target. Yet, buyout speculation has been thrown around for years now and hasn't happened, so it is not a significant part of my investment thesis. Still, the potential for a buyout is a benefit to shareholders worth noting.

Overall

I know it may be hard to look past GoPro's troubled past, but it is the reason the stock is available at a bargain price. With a good outlook for 2019 and potential for sustained profit growth, shares of GoPro have potential for a high rate of return.

Despite the fact that I believe they are a compelling investment, shares still carry a lot of risk. You don't need me to tell you that this is no blue chip. Due to the risk and volatility of the stock I will be adding only a 1/2 size position in my portfolio. I will increase it to a full position under certain conditions:

1.If the share price falls under $4.70 without any significant negative change, thus allowing me to decrease my cost basis to about $5. If GoPro can meet analyst estimates of .26 cents, and maintains it's current P/E of 20, that would imply a value of $5.20. If they do show that they can stay profitable, I think it would warrant a valuation expansion, so I view $5.20 as the very low end of fair value for the stock. If I can own the stock below $5, it gives me a cushion if management comes below expectations.

2. If GoPro management can show consistent operating improvements over the next several quarters, I will reevaluate the stock to see whether it is worth adding to my position.

Happy investing!

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.

Additional disclosure: This article should not be considered professional investment advice. Always do your own research before making investment decisions.