Now that shares of this high-flyer have fallen back to earth, it might be time to add this fast-growing company to your tech portfolio.
GoPro (GPRO)
from Game Changers (formerly 100% Letter)
Although there are many inexpensive video camera options out there, there is a dearth of quality offerings. I’ve had several—trying to find that perfect blend of small size, durability and power—and they’ve all come up short.
The fact is there is nothing on the market that even comes close to a GoPro (GPRO) in terms of function, ease of use, durability and performance. And as the company continues to develop its products and form functions evolve, including what I expect will include models aimed at “normal” people, I believe there remains massive growth potential.
That’s why we’re jumping into this stock. And we’re doing it today, because I think that shares of GoPro have finally bottomed in the low $40s.
GoPro specializes in small, durable and powerful cameras specifically designed for capturing action activities, including skiing, surfing, scuba diving, biking, hunting and fishing. GoPro’s cameras are different because of their high performance and durability, and because they enable a user to capture video footage of themselves in action by using a combination of accessory mounts (for helmets, bikes, surfboards, etc.) and remote controls (including smartphone apps).
The company was the first-mover in this market. And it’s the clear market leader in the digital camera and accessories market. Its core product is the HERO line of cameras, which range in price from $129.99 for the HERO, to $499 for the HERO4 Black.
The stock has been all over the news since mid-2014, when it jumped 30% after going public at $24, then rallied to over $90, and then fell like a rock. I watched this stock closely, amazed that investors were buying shares at such lofty levels. But that was then, and this is now. And right now the stock looks pretty good to me.
Here are the catalysts I think will get shares of this Game Changer rallying in 2015.
Catalyst 1: GoPro is growing like a weed. Over the last five years it expanded from 400,000 units sold to 5.2 million. It sold 1.5 million more units in 2013 than in 2012 (65% growth), and 1.4 million more in 2014 than in 2013 (37% growth). As the market leader GoPro still has pricing power, so revenues have grown even faster. From 2010 to 2014, revenues exploded from $64 million to $1.39 billion. Revenue growth in 2014 was 41%.
Over the next two years I expect a conservative estimate of 25% revenue growth is attainable, with 35% possible, without any major new product category introductions. Even in its current categories, product refreshes are spurring growth, as evidenced by the October 2014 launch of the HERO4, which led to 2.4 million units sold.
Catalyst 2: Unlike a lot of small companies, GoPro is profitable on both a GAAP and non-GAAP basis today. And EPS is growing quickly. In 2014, non-GAAP EPS expanded by 164% to $1.32 (GAAP EPS grew 96% to $0.92).
Let’s assume revenue and EPS growth average 25% over the next two years. Shares of GoPro would then carry a P/E ratio of 25 based on 2015 expected EPS, and a P/E of 20 based on 2016 expected EPS. That’s a premium, but not a huge one, especially given that broad small-cap indexes like the Russell 2000 and S&P 600 carry P/Es near 19 times 2015 expected EPS.
Based on very reasonable expectations I think this stock should be trading close to $60 right now, which implies over 40% upside.
Catalyst 3: With revenue and EPS growth of 25% likely and a forward P/E that’s probably overstated at 25, this is a powerful lifestyle brand that can be owned for several years. But beyond the “now” there is a lot of potential. Management is highlighting international opportunity (current sales are 64% Americas, 27% EMEA and 9% APAC), including Brazil and China.
I do think there is very real potential for GoPro to find ways to monetize its user base and become more than a device and software manufacturer. GoPro is in the early stages of this effort to build out and leverage a content management platform. GoPro Studio and GoPro App allow users to quickly edit videos and wirelessly transfer them to other devices, including mobile.
It also has begun to distribute programming through the GoPro Network, which includes GoPro Channels on Instagram, Pinterest, Twitter, YouTube, Facebook and partnership platforms with Virgin America (VA) and Xbox Live.
Additionally, a Roku channel is coming this spring, and GoPro has already developed partnerships with the NHL, ESPN and Vislink (VSLUF). These partnerships mean that GoPro cameras are increasingly used in live television broadcasts, where the devices are really well-suited for capturing fast action. Think of events like Winter X-Games, Olympics, America’s Cup and Formula E.
With expectations relatively low right now, and the stock forming what appears to be a solid base after a sustained and violent sell-off, I see a window for investors to sweep in and establish a position in a company that can deliver 40% or greater gains this year, with significant potential to deliver multi-bagger returns in the years ahead.
Tyler Laundon and Ian Wyatt, Game Changers, www.wyattresearch.com, 866-447-8625, April 2, 2015