Don't Underestimate GoPro As It Hunkers Down On Profitability

Summary

• GoPro reported much stronger-than-expected Q2 results, driven by success in sales of its higher-end cameras.
• The company is also launching a new lifestyle gear brand. While unlikely to dramatically change GoPro's story, it adds a new high-margin revenue stream.
• GoPro expects to be profitable in the second half of 2020, something many investors may have not thought possible.
• With a <$1 billion market cap and undue pessimism over the stock, GoPro is a dark horse that may benefit patient investors in the long run.

For almost as long as it's been a public company, GoPro (NASDAQ:GPRO) has been in the market's penalty box. Decently popular as a consumer gadget, but never really catching on as a company, investors and Wall Street have critiqued GoPro's niche hardware products, unpredictable replacement cycles, and lack of innovation in bashing down the stock.

Yet this year, GoPro has executed reasonably well - despite a coronavirus that has prevented most of us from traveling, and thus from needing GoPro's action cameras. In my view, the company - and its founder/CEO Nick Woodman - has dramatically culled back its ambitions and megalomania and is resolved to operating as a smaller, more profitable company.

In early August, GoPro recorded better-than-expected revenue results driven by strong sales of its higher-end cameras. And though hardware companies like GoPro have the ability to "stuff the channel" in order to hit quarterly targets, GoPro also reported strong end-customer sell through and noted a reduction in channel inventories.

Though they now mostly fly under the radar and beneath the shadow of far more popular software and internet stocks, several small consumer hardware companies have netted big payoffs for investors this year. Arlo (ARLO) is one of the best examples of this. I recommended Arlo in early July at <$3/share after noticing that its balance sheet cash virtually equaled its market cap (indicating a company that was essentially trading for free); since then it signed on a major partnership that is expected to boost growth and posted strong results, sending shares up more than >2x.

I now see a very similar opportunity in GoPro, driven by its highly increased operating efficiencies and commitment to profitability. I also like the fact that earlier in the month, GoPro announced the launch of its lifestyle gear brand. While unlikely to materially change GoPro's growth

Analyst’s 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.