GoPro: Stock Down, Outlook Up

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About: GoPro, Inc. (GPRO)
by: Joe Albano
Summary

GoPro raised guidance for the full year and sees growth into the double digits.

The market has punished the stock regardless.

But management has put up numbers ahead of higher guidance and new initiatives for 2020.

Comparing the financials moving in the right direction to the reaction of the market brings me into a long position.

Before the most recent earnings, I had no interest in returning to GoPro (GPRO) to consider an investment. It had been - and continues to be - a broken stock for the better part of four years. There's not much to like about what the stock has done in that time.

But as we know, the market is forward looking. So the past is only a history lesson of the story, not what the story will be in the future.

What I've found intriguing is the market's reaction to positive developments. Revenue guidance, which had been an important factor in the market's disposition of GoPro's stock, was bullish for a change. Yet, the market sold off on the news.

(Source: spivo.com)

The unfolding story seemed to be changing in a good way and not a continued string of disappointment, and yet the stock was punished for it. I had to take a closer look at this disconnect as I saw shares approaching a prior bottom, possibly creating a floor in which the stock will bounce off of.

First, a quick backstory to bring you up to speed from my prior opinion. In my last article from May, I discussed how gross margins weren't matching up to my expectations, but at least revenue was. I said this could be enough to sustain the stock as "good enough" could suffice. I juxtaposed that opinion against a technical chart which pointed out a potential double top forming. If the stock couldn't push past it, then it likely would return to lows.

As I've told my subscribers, GoPro's chart is contending with a double top, and if it can't break and close above $7.50, it will be a resistance that stretches back to September of last year.

GoPro appears investible as long as it continues on this track of execution - which is still the most significant risk. Any bumps along the way and this all goes out of the window, and the stock will revisit lows.

What's been interesting is there haven't been any real bumps along the way since then. Revenue and profit expectations have only gone higher as the year has gone on. Yet the stock has gone from $7 to $4, which is why I'm writing this article.

A Disconnect

There's not a whole lot of exciting things taking place with the financials at GoPro, but we have to keep in mind the valuation and the story is at rock-bottom levels. So it doesn't take exciting things to produce a turnaround. It only needs to show the bleeding is stopping.

You could quickly go straight to the things which matter: Gross margins, revenue, and EBITDA vs. stock price and valuation.

Chart Data by YCharts

The chart is a little busy, but it takes into account the essential factors: Gross margin, revenue, and EBITDA. They are all on the rise since a poor showing in 2017 and 2018. After dropping Karma (drone), the company has leaned out and picked up needed steam in the right areas. However, the stock, along with price-to-sales, has hit all-time lows.

But, based on these key factors, it appears the financial bleeding has stopped. And, as I said, the past is just a history lesson of the story. So what does the future hold?

Evidently, a continued move up based on management guidance and remarks for the second half.

But I get it - you can't trust management as far as you can throw 'em. Especially this management. But here's the thing. Take an honest and unbiased look for a second. The financials have turned around, so it isn't just talking the talk, it's finally walking the walk. This is why the past - especially the recent past - is important before we move to the future perspective. It's backing up what it has been saying with financial numbers as it continues to move in the right direction.

So when management says it's raising guidance for the second half of the year to produce 10-11% growth year-over-year as opposed to prior guidance of 8%, you can stop and say, "Well, it has been performing well this year, so this raise in guidance isn't out of the question." Adding to that, this is a positive divergence from the last couple of years, which has produced negative 0.4% and negative 2.4% growth in 2017 and 2018, respectively.

Going from last year's low single-digit decrease to this year's potential low double-digit increase in growth is a turnaround.

What About Into Next Year?

Since the market is more forward looking than four months, we have to consider early 2020. For this, a conveniently timed conference was scheduled last week where both the CEO and CFO discussed plans for next year. What stuck out to me was this upfront look at 2020 by the CFO:

We believe the macro factors of revenue, margin improvement, and OpEx containment will continue into 2020...

This goes right along with my argument above about seeing improvement throughout this year - management expects this to continue into 2020. Continuing to grow revenue, expand margins, and keep expenses under control is exactly what is needed. It cannot let its foot off the gas with momentum it hasn't seen since 2015.

How will it do that is the question. This conference had quite a few tidbits of info in it and investors need to dig into it to find for themselves what is important, but I saw these as good indicators:

Our paid subscriber growth has accelerated in Q3 increasing nearly 20% since the end of the June quarter. And while revenue is relatively small here the percentage, as a percentage of the total, it's very high margin recurring revenue helping to drive operating profit for the business.

This one for more of a road map from the CEO:

...we're also really excited about 2020, see it as a growth year both top-line and in terms of EPS, and that's just in our core business as we've got it today, but we also see 2020 as an opportunity to introduce some new products and services that we think can grow the business for the long term ... We see an opportunity to grow our existing services business, while also introducing a new service in 2020 that will be relevant to hardware ... the opportunity to monetize our app in ways that we just simply haven't before. That's a 2020 initiative. And also in 2020, we plan to extend our brand’s relevance by introducing products in new categories that we think will excite customers.

Make sure you don't miss that first sentence: Expansion of top and bottom line just in the core business of today. That's a continued hammer on the more-of-2019-in-2020 nail. So regardless of the other initiatives, revenue should continue on the back of what it does today.

And then there's this one which reinforces the above thought:

Our brand stand(s) for durability, versatility, and waterproof performance (and) is very highly regarded. And we think that we can extend those brand traits to products outside of what we current --previously offered.

Now, the last one might scare off some investors as the first thing which comes to mind was the drone and the failure it was. However, this sounds like related products the company is not currently in but make sense to be in. Drones were a bit of a stretch but something more material like accessories or systems for non-hardcore action aficionados would be a better business approach.

One last thing from this conference, which management can control, is its ability to push sales through its direct channel. This means better margins but also better metrics of who and where its customers are. The CFO touched on this point with some material information:

...GoPro.com. We've been able to increase our own footprint that was about 10% of our revenue. It's almost double from where it was about a year or so ago. We've put a major focus on conversion rates and dot com and that's been very effective.

It comes down to this: We can rag on GoPro, management and past failures. It deserves all of that and more. However, there's a point in which you change the conversation and acknowledge the turnaround, albeit small, which is happening this year. It will take the company some time to prove itself, but the evidence is already clear. Regardless of your opinion of its products, it's top and bottom line are improving over the last year and over 2017. To ignore this is to continue in bias confirmation. To work in these new numbers is to be a prudent investor - regardless of your commitment of capital to it.

But I want to leave this thought with what the CFO thinks about you not working in those numbers for 2020:

And when you do that math you get some pretty sizable bottom line expansion and leverage right on the business, which quite frankly, isn't even reflective in The Street models. You have it basically flat. Yes, no growth and no growth in earnings in 2020 on the Citibank model, right.

And so we feel that, I think we are disconnected between where we think we are running the business. And where kind of The Street has us pegged for 2020.

Opportunity Ahead Of The Market

These are all the signs of a healthier GoPro. So when it says it's lifting guidance, there can be some confidence behind it. Overall, the company is starting to hit a stride, and while not anything amazing like 30% revenue growth, moving from small negative growth to double-digit growth in a year is a material improvement.

As I mentioned at the beginning, signs the bleeding is stopping are the first signs an investor needs to see a turnaround occurring. Right now, the market has diverged from this good news. In my investing experience, it can mean one of two things: A trap and things financially will reverse, or an opportunity the market is ignoring right now. While I don't entirely put my trust in management due to past repeated failures, this time, it has put up the numbers ahead of the bigger plans and raised guidance. This gives me more confidence in the investment and less worry of a trap, especially with it at all-time lows. With the market's reaction to drop the stock to these lows, I decided to re-enter GoPro. And while a small position to start, now is still a time to buy and increase that position.

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.