How GoPro Can Become a Great Company (and Stock)

Wait a Second. GoPro Soared 20%?

GoPro (GPRO) is one of those stocks that always draws a lot of attention. It did so when it was soaring in early 2014, when it was crashing later that same year, and again when it was crashing in late 2015. It’s even drawn eyeballs over the last two years when the stock hasn’t done much at all, other than mount a failed rally on the back of high hopes for last year’s new product launches.

Given its popularity, it’s not surprising that there was a flurry of articles covering GoPro when shares jumped 20% following last Thursday’s surprise earnings beat. In a minute, I’ll get into the earnings report and why the stock rallied so much. I’ll also give you my opinion on whether or not you can make money by buying it now.

But first, let’s talk a little about GoPro and what I think could make the company great once again (assuming it was great before it began flailing post-IPO).

How GoPro Can Be Great Again

GoPro started out as a hardware company that had a really neat and innovative product. Sure, the market for action cameras is somewhat limited, but that didn’t become an issue until the company went public. After the IPO, there was more pressure to show a growing addressable market, push revenue and EPS growth, etc. And that seemed to shift the company’s focus to creating an entertainment unit, creating media relationships and figuring out ways to leverage all the content created on the cameras.

The problem was that amateur video footage doesn’t have much value unless you have a personal relationship with the people on camera. And the company then failed to do what it had started out doing, which was innovating on the product development front. At least, that’s my interpretation of what happened.

Lost in the shuffle was GoPro’s ability to expand its user base to people like me, who could have been customers by now—and could be on their second or third camera.

I’m relatively adventurous. I ski. I surf. I mountain bike. I fish. I have kids. I’m in an older age bracket (over 40) that I suspect GoPro has trouble penetrating. And I try to document many activities with my iPhone, but it’s pretty annoying to do so. The risk of destroying an expensive cell phone is relatively high, so I don’t use it that much. A GoPro seems like a good thing for me, but I still don’t have one.

Why not? And why did I return the one my wife bought me for Christmas? GoPro, listen up!

The answer is simple. Because, as much as I’d like to capture more picture and video footage of activities in my life, I don’t want to feel like a tool while doing so.

tool: (n) [toooooooooool]

1.) One who lacks the mental capacity to know he is being used. A fool.

2.) An un-cool person. A loser.

3.) Someone whose ego far exceeds his talent, intelligence and likeability.

There are a lot of people who like the idea of a GoPro, but feel like I do. Our desire to avoid looking toolish wearing GoPros is stronger than our desire to capture the footage.

I believe this has stopped not just me, but tens of thousands of other potential buyers from taking the step that, in my opinion, could help turn GoPro back into a great investment. Implied in my reasoning is that if GoPro could pull us into the fold, it will have become a great company by significantly expanding its user base through product innovation.

Before I get a lot of angry emails, let me clear up one thing. I’m not saying that everybody that wears a GoPro is a tool. I’m sure some are and some aren’t. A lot of people feel fine wearing one. More power to them. A ton of kids have GoPros, and they all get a pass because, hey, they’re kids.

But from conversations that I’ve had with a lot of other people that do the same activities I do, the main hesitation isn’t video quality, desire to capture content, cost, etc. It’s all about not wanting to wear a big accessory that sticks out like a sore thumb.

I have no formal market research to back up this assertion. And I don’t know the precise number of potential customers GoPro is missing out on. But I think it’s a very, very significant number.

I also think it’s not an unsurmountable challenge to get me and people that feel like me to buy one. It’s just a matter of innovating on the form factor front.

In plain English, that means changing the size and shape of the camera so that it’s not so obvious while being worn. I don’t want to look like a peacock while skiing or mountain biking. I’m not going to hold a camera in my mouth while surfing, drill into my board to mount it, wear what looks like a laser tag vest to hold it in front of my body, or hold it in one hand while paddling with the other (I’m just not that good a surfer!). I think the head strap accessory GoPro makes is good for a lot of low impact activities and ends up looking like a headlamp, but the reality is these are the times when my iPhone works well enough.

Even though GoPro made progress shrinking the form factor with the Session (far right in this image), the ice cube sized camera is still too big. There’s just no way it’s going to happen.

I’ve spent the last couple of years thinking that innovation on the form factor front is such an obvious way to grow sales that GoPro is working on solutions.

But I could be wrong. If I am, and the engineers don’t have files full of drawings and technical specs, I want to make a few suggestions and point to specific examples on the market that GoPro should be working toward (in my head I’m shouting, “Aren’t they doing this stuff already!?).

The first idea is to incorporate the camera into helmets. GoPro could design their own (probably the best route), or partner with leading helmet manufactures in biking, skiing, motocross, auto racing and other markets. Given that we’re all wearing helmets for all these activities anyway, this represents a very low hurdle for those of us who don’t want the helmet-mounted accessory.

I’m sure there are technical challenges to overcome, like where do you put the battery, how do you adjust the angle, what about durability, safety, etc. But these seem surmountable, especially for what should be an innovative company that created the action camera category.

I did a quick web search and came across a small company in California pursuing this design. It’s called C-Preme, and it has a couple of subsidiaries, Bult and Video Head, that make helmets with integrated cameras. I don’t know anything about it, but the concept seems like a natural fit for GoPro.

Another idea is to incorporate the camera into goggles. Again, we already wear them for a lot of activities (skiing, diving, motocross), so it’s not a big deal to buy a pair with a camera, assuming it functions just as well as other alternatives. There are various versions of this on the market right now that you can buy on Amazon, including a number from a company named Liquid Image. I have no idea if they’re any good.

Designing a camera that’s an improvement for surfing is more challenging. You could integrate one into various locations in a wetsuit. Surfers wear hoods in cold water, or there could be room on a shoulder or chest. For warm water applications, a lot of surfers wear rash guards on their upper halves, and, like a wetsuit, a small camera could be incorporated into the fabric on the shoulder. It would probably have to stick out some, but not as much as current designs. Cables might be necessary to allow for a battery back in an unobtrusive location like around the waist (heated wetsuits on the market use this approach).

These are just a couple of ideas. Clever engineers might be able to make one camera that could work in helmets, goggles, wetsuits and other pieces of equipment. It seems worth the effort. In addition to expanding the market for the cameras, there are also tons of potential accessory sales that would align with GoPro’s current sales strategy.

Should You Consider Buying GoPro Now?

Let’s move on to what GoPro actually did in Q2, and why the stock jumped almost 20% last Friday.

The main two reasons were that revenue of $297 million beat by $27 million (a 10% beat), and EPS of -$0.09 beat by $0.16. Both were significant beats and represented big percentage-based improvements; revenue was up 34% while EPS was up 83% (albeit still in negative territory, but let’s not be overly critical). Here’s what the charts of quarterly revenue and EPS look like.

Other contributing factors were that channel inventories appear to be back to normal (meaning retailers aren’t sitting on boxes of unsold cameras), the new HERO6 camera is reportedly on track for launch this quarter (we don’t know what the form factor is), the new QuikStories software (integrates easily with smartphones with ready-to-share videos) appears to be popular, global sell-thru was up 18% and sales on Amazon Prime Day were very strong.

The high-end Fusion 5.2K spherical camera also sounds like an exciting new product. And the Karma drone might finally be selling a few units (though still less than 10% of revenue), and is launching overseas.

Management has said it’s trying to do fewer things better. One of the central parts of its growth strategy is to go back to its roots and focus on delivering better products and services to its target market, which includes a lot of consumers who are already GoPro enthusiasts. Within this strategic re-focus, I think there’s room for serious innovation on the form factor front, including some of the ideas I just talked about.

“While we are building experienced sharing products and solutions for a much larger addressable market, we feel that the easiest way to gain momentum and the appropriate way, frankly, is to market these improved solutions to our existing community, our existing customer base and lookalike customers, consumers who fit a GoPro customer profile, but haven’t yet purchased from us.” – Nick Woodman, GoPro CEO, Q2 2017 earnings call

Another key element of GoPro’s strategy is to push integration with smartphones so that GoPro devices function like extensions of a smartphone, capturing content that can then be quickly and easily edited, then distributed to contacts and social media sites via all the popular smartphone apps. This makes sense, for now. But within a few years, I think GoPro needs to offer cameras that can connect directly to cellular networks. This would be a big step forward and remove a lot of integration challenges. Apple is working on this very thing with upcoming Apple Watch models. If they can do it in such a small device, GoPro should be able to too.   

(Just a side note here: people love to speculate that GoPro will eventually get acquired by somebody like Apple (AAPL), Amazon (AMZN) or Google (GOOG). Having its devices well integrated with smartphones seems like a step in the right direction, given the importance of hardware and software integration.)

Management guided for 25% revenue growth in Q3 (plus or minus 5%) and EPS of -$0.06 (plus or minus $0.05). Both these numbers are well above consensus estimates, which had projected around 15% revenue growth and EPS of -$0.12.

Another notable strategy from the conference call was that management is saying it plans to constrain inventory for late in the year (i.e., Q4). The idea is to avoid excess inventory, preferably forgoing some potential sales, delivering a profit and being well-positioned for 2018. This strategy makes sense and seems to be the trend with outdoor product companies with high customer loyalty (good luck buying a Patagonia jacket in your size and a good color in December or January!).

The bottom line is that GoPro is guiding for low single-digit revenue growth in 2017. That implies there will be zero revenue growth in Q4 (it had a monster Q4 in 2016 when the company was flooded with inventory). I have to believe that surpassing guidance is almost a gimme. At this point, we all know the company has to under-promise and over-deliver.

Let’s assume management is allowing plenty of room to beat. Revenue growth could be 30% (to $313 million) in Q3 2017, and 3% in Q4 2017 (to $557 million). This implies 2017 revenue growth of 17% ($1.39 billion). And if you go with the same 17% growth rate in 2018, you get to $1.62 billion in sales. This gets you back to GoPro’s revenue in 2015 (not coincidentally, since I worked the numbers this way!). Presumably, with its reined-in cost structure, EPS would be back in the black, and possibly even above the 2015 level of $0.76.

This might be an overly bullish scenario. But it doesn’t seem impossible. And frankly, I’d be surprised if management hasn’t talked about how it can accomplish this very goal. It would mean three years to get back “on track.” Which, if management is capable, should be doable.

If GoPro comes close to replicating its 2015 results in 2018, I suspect the stock would be up 100% from where it is now by 2019. That’s only 16 months away. Assuming the share count is unchanged, the stock could hit 20 at the end of 2018 and be trading at a trailing PE of 25, if GoPro delivered EPS of $0.76. That’s not a crazy valuation.

Should you buy it?

That’s a very tough call. It’s been a losing bet for so long. And while you want to believe the company can pull it together, the evidence thus far hasn’t been very convincing.

But if you want to roll the dice with a little money, are comfortable holding on for a while (and through some volatility), and have the discipline to average in and not get too emotionally attached to the stock, I think dabbling a little could pay off. I’d probably wait a week or so to see how the stock settles in after this big jump. And then start very slow, buying up to 20% of a desired position size first, waiting a while, and going from there.

One of the compelling things about the stock now is that nobody really likes it. Analysts are barely lukewarm on the name, even after this recent move (I think everybody’s been burned before). When nobody likes a stock and it’s not going down, it typically means that everybody who’s going to sell has already done so (look at the long tail on the stock’s chart). Perhaps the only way left to go is up.

Probably the best advice I can give you is the one I’m taking myself. I own a very small position in the stock, and plan to keep it for a long time. I’ve bought a little more over the past couple of years, and I’m open to buying a little more. But I’m not rushing out to buy more tomorrow. I’ll wait to see how the stock trades following this report, to see how HERO6 is received (it should launch in September), and go from there.

My big picture thesis is that, eventually, the company will expand its market by offering new camera form factors. I think I’d become more bullish on the stock if the company made products that I liked. I do think the brand is well enough known and there are enough loyal customers that the company can be managed, at least, as a steady, slow growth enterprise that’s quite profitable. That’s not asking a lot, and even that scenario could mean a market-beating return over the next five years.

Read More

GoPRO (GPRO): Price doesn’t reflect bottom-line

By Tyler Laundon, Chief Analyst, Cabot Small-Cap Confidential
From Cabot Wealth Advisory 10/12/15 Sign up for Cabot Wealth Advisory—it’s free!

GoPRO (GPRO) hit a post-IPO low last week after falling more than 50% from its August high.

I’m not a dedicated GoPro advocate, and I haven’t yet coughed up the cash for one of their cameras. But I find the stock compelling, despite that fact that I’m not fully convinced the company will fend off all the competitive threats out there, be able to innovate quickly enough to continue to grow its user base, or scale its media business.

I like GoPro for what it is now: a highly specialized device manufacturer that absolutely dominates in its niche product category. And I think that off that base, there’s a lot of future growth potential.

GoPro’s best days don’t seem behind it, and the brand seems as powerful as ever. It is showing up in bigger and bigger markets, getting called up from extreme sports to the big leagues, and making cameos on Hollywood movie sets. It is also expanding content distribution through partners that include Hulu and Comcast (CMCSA).

But what catches my attention most is the company’s pace of growth. Annual revenue growth in 2013 and 2014 was 87% and 41%, respectively. EPS growth was 115% and 138%, respectively, and gross profit margin expanded from 37% to 45%.

GoPro is on pace to grow revenue by 38% this year, to nearly $2 billion, and to grow EPS by 32% to $1.74. That is, of course, if consensus estimates are accurate, which they have not been. Over the past four quarters, the company has beaten estimates by an average of 40%, suggesting that even though the stock pops or drops on analyst rating changes, such ratings may not be worth paying much attention to.

The valuation of the stock seems to suggest a pretty sizeable disconnect with the company’s bottom-line results too. At the current price of just over 29, shares of GoPro trade with a forward PE of just 14, and a PEG ratio of 0.5. The price-to-sales ratio is a meager 2.2.

I look at those numbers and think that even if competition does increase, even if the company’s new small form-factor Session camera—its smallest and lightest yet—is a flop, and even if most people don’t want a GoPro stuck to their head, the stock is still attractive.

With the company making progress shrinking the form factor and introducing its own drone next year, I think there’s ample room for sales growth. And that doesn’t include what it could do if they can figure out how to make the cameras attractive to all the parents (like me) and grandparents who just want to capture everyday moments.

I don’t know if GoPro will go up from here. If it does, I don’t know if the ride will last weeks, months, years or generations. But I think it’s worth taking that first step and buying a little. Just like the action in front of the camera’s lens, the stock tends toward the extreme, and this selloff looks overdone. Earnings will be announced on October 28, and there should be a good deal of interest in the stock up to and through that event.

I’m always watching and waiting for that next wave of opportunity to appear in small-cap stocks. And I recommend my best ideas to Cabot Small-Cap Confidential subscribers every month. These readers are enjoying a pretty nice ride on my latest selection, which is up 15% since we jumped onboard October 2. With a little luck, the ride will continue.

GoPro (PRO): A new video photography category

By Timothy Lutts, Chief Analyst, Cabot Stock of the Month
From Cabot Wealth Advisory 12/29/14 Sign up for Cabot Wealth Advisory—it’s free!

GoPro (GPRO) is a California company that makes and sells digital video cameras that can be mounted on anything, including cars, motorcycles, surfboards, drones, helmets, small children and animals.

Lots of them were under Christmas trees last week.

Here’s what I like about this company and why I think it will lead the revolution.

A few decades ago, the leading companies in the photography business were Kodak, which had virtually created the industry, and Polaroid.

Then digital photography came along and the old giants failed to adapt. They were too busy protecting their legacy products. Before long, Canon and Nikon ruled the business, while Olympus, Panasonic, Pentax, Samsung, Sony and Minolta all played catch-up.

And now history is repeating itself, as GoPro has singlehandedly created this new video photography category, and leads its competitors by miles!

GoPro had revenues of $234 million in 2011, $526 million in 2012 and $986 million in 2013. It has number one name recognition, backed by expert execution and marketing.

And it has yet to penetrate foreign markets deeply, as 57% of its revenues come from the Americas.

Analysts are projecting that the company will grow earnings 87% this year and 23% next year, but I think management, which has proven extremely far-sighted and capable, will surprise with some major strategic move—perhaps into the drone business.

So the story is top notch, but what about the chart?

GPRO was very hot this summer, coming public at 24 in June, jumping to 50 by July and then pulling back below 40 in early August.

That’s when I named it my favorite stock at the Cabot Investors Conference. (Maybe you’ll come next year? Click here for details)

It zoomed to 98 in early October, and since then, profit-taking has dominated, as the stock cooled off. It’s a natural cycle, entirely normal.

The stock got as low as 55 two weeks ago, but buyers stepped in last week and I’m optimistic the next leg will be up, not least because of the positive economic news that low oil prices have left more money for consumers to spend on gadgets like GoPro cameras.

Also, sometime in January, we’ll learn how many cameras were actually placed under Christmas trees for the holidays.

But even better than a $400 camera might be six shares of GPRO stock!

It that makes sense to you, feel free to take the plunge here. Just note that I may not mention GPRO again.

If you want regular updates on the stocks you own, it’s better to become a reader of one of our expert advisories. And if you want the most growth-oriented of all, you want our flagship Cabot Market Letter, which has been advising investors how to make money (and not lose it) since 1970!

GoPro (GPRO): The cool people at the party

By Timothy Lutts, Chief Analyst, Cabot Stock of the Month
From Cabot Wealth Advisory 10/20/14 Sign up for Cabot Wealth Advisory—it’s free!

If I mention the name GoPro (GPRO), you probably know what I’m talking about. Or at least your brain refers to an image of what you think I’m talking about.

But when I mention Frontline (FRO) you probably don’t. (I picked the stock at random, specifically for its lack of public visibility).

So when an editor at The Wall Street Journal or The New York Times or Google or Yahoo is deciding what stories to feature, what’s he going to go with, GoPro or Frontline? The answer is obvious. He’s going to give the people what they want.

Which is why my computer news screen shows me headlines like “Michael Schumacher’s Brain Injury Caused By Helmet-Mounted GoPro,” and not stories about Frontline’s crude oil shipping business.

The headline with two high-profile names is going to get clicks. And the Frontline headline is going to be ignored.

So what does this have to do with investing?

Well, people have evolved to be social animals. They feel more comfortable when others around them are doing the same thing, whether it’s cheering for a football team or drinking Pabst Blue Ribbon or chai lattes.

And when people invest, the same social instincts factor into their decisions. We feel more comfortable, more confident, if someone we respect also owns—or recommends—the same stock.

Which is one reason why a lot of investors piled into GoPro stock this year. They were the cool people at the party. They were excited about the future. And best of all, they were making money.

The GoPro party (symbolized by its stock’s ascent) was one of the very last ones still going on while the stock market slowly crumbled in September.

But as any celebrity will tell you, being famous is a double-edged sword. And when the going gets rough, and all those fair-weather partiers disappear, the media are only too happy to highlight the (alleged) darker side of the celebrity.

Thus the headlines about Formula One driver Michael Schumacher, who was wearing a GoPro-mounted helmet when he fell on some rocks while skiing last winter. (Obviously, his family can’t sue the rocks, and ski areas and helmet-makers have learned to immunize themselves against lawsuits, but with GoPro factored into the mix, I can almost hear the lawyers calculating.) The story gets clicks, and that’s what advertisers are watching these days.

Contrarily, if a Frontline tanker captain got drunk and fell off his ship, you’d probably never know about it. No celebrity, no notoriety, and no big money. If there was a story, who’d click on it?
Bottom line: the Internet is just a new player in the herding game.

But it hasn’t changed the way the game is played. When you invest in growth stocks, growing popularity on the way up is wonderful—and you wish the party would last forever.

And when the party ends, bad news sells even faster than good news. Winds blow hard on high hills. Which is why the Schumacher/GoPro story, first reported in February (!) is now getting traction. Could there be more negative GoPro stories ahead? Of course.

If you’re an investor in GPRO, you have a choice. You either dig in for the long haul and wait for the storm to pass (doing this requires a solid profit combined with a strong conviction that the company will weather the storm and come out stronger.)

Or you cash in your chips and wait for the next party to start, quite possibly somewhere else.

Note: GPRO was featured in last week’s issue of Cabot Top Ten Trader. For more information, click here.

GoPro (GPRO): Entirely new industry

By Michael Cintolo, Chief Analyst, Cabot Growth Investor and Cabot Top Ten Trader
From Cabot Wealth Advisory 9/26/14 Sign up for Cabot Wealth Advisory—it’s free!

What intrigues me is that for all the hype surrounding Alibaba, there have been other big-story, big-numbers IPOs that formed bases and lifted off in recent weeks with considerably less fanfare. My favorite is GoPro (GPRO), which excites me because it’s effectively created an entirely new industry—action cameras and videos. Here’s what I wrote about the company in Cabot Top Ten Trader on September 8:

“GoPro is king of the wearable action camera. The company manufactures small, lightweight and extremely durable high-definition cameras that allow consumers to easily record their adventuring escapades and then just as easily post and share those videos and pictures online. GoPro’s flagship products include the HD Hero and the Hero 3+, which can download footage into GoPro Studio, the company’s desktop video editing application. The company also offers remote controls and integration with mobile devices via its GoPro App. Although the company’s most recent quarterly report raised a few eyebrows, analysts expect GoPro to have a big holiday season, and this is what’s behind the strength in GPRO shares, with analysts at Dougherty telling clients that “GoPro has established itself as one of the most valuable brands in consumer technology and has significant headroom to grow.” For instance, during the 2013 holiday season, GoPro was sold in roughly 3,000 locations. Now, the company’s cameras have shelf space at nearly every sporting goods and electronics retailer location! Lastly, the company is expected to realize significant growth overseas, a market which GoPro is only beginning to tap into.”

The chart looks strikingly similar to some of the IPO base examples above—GPRO priced below 25 and soared to 50 after four days. Then it paused for seven weeks, though admittedly the range was wider than normal (25% or so). But given the huge run-up right after coming public, such a dip looked normal on the chart. GPRO exploded to new highs in late August and remains in great shape today despite the shaky overall market environment.

That shaky environment is the only reason I haven’t bought in yet—I’m still seeing lots of “late-stage” evidence in the market that tells me risk is rising here, even as the Dow and S&P 500 are near their peaks. (The broad market is very weak, with five times as many stocks hitting new 52-week lows than highs, even on Wednesday’s rally!)

Still, GPRO is a name worth watching; I wouldn’t chase it up here, but another consolidation of two or three weeks, or possibly a dip back to or below 70, would be tempting to nibble.

If you’d like to receive more updates on GPRO and receive an additional 10 momentum stocks each week, take a risk-free subscription to Cabot Top Ten Trader. This year, we grabbed many double and triple-digit winners, including 303% gains in VipShop Holdings, 126% gains in Canadian Solar, 133% gains in Netflix, and we see many more strong stocks that are ready to break out. Click here for more information.

Read More

Stock Chart