GoPro, Inc (GPRO) is an American action camera manufacturer and developer of mobile applications and video editing/sharing software. Although extremely popular with a group of customers specializing in the content creation space, GoPro struggled to reach a wider audience and growth remained stagnant for most of the 2010s decade. However, recent fundamental changes to the company’s business model attempt to generate hope for the company’s future. A relatively attractive valuation is also explored in this analysis.
For a stock that once traded above $80, current prices look daunting. Following a generous IPO valuation in June 2014, GoPro’s share price rose aggressively thereafter. After a spike in volatility, a free fall ensued, driving the stock price below the $10 range. Trading sideways since then, GPRO has seen recovery efforts from the Covid-19 pandemic in 2020 as financial performance appears to be improving. Currently, the stock is trading at a significant discount to 52-week highs, while marking an 11% year-over-year growth.
A dynamic business model
In September 2004, GoPro developed and sold its first camera, the 35mm HERO, generating sales of $350,000. After a solid growth phase in the early 2010s, GoPro’s revenue peaked in 2015, when the company generated $1.6 billion in sales. Since the company hasn’t been able to hit that number since, with sales stagnating, analysts have questioned GoPro’s business model and its long-term sustainability.
After a disappointing few years in which analysts and investors lost hope for the company’s future, GoPro has made some fundamental changes to its business model that were arguably long overdue. The introduction of subscription plans and services has allowed GoPro to grow from a hardware manufacturer to a multi-dimensional technology company offering an ecosystem that its customers can be part of. This ecosystem currently includes hardware cameras and accessories, cloud storage video services, an app that allows users to share and edit their photos and videos, and some lifestyle gear and apparel.
Through GoPro’s subscription plans, customers can access the company’s services while obtaining discounts, equipment protection services and other offers for hardware equipment. The app also allows for additional monetization. The subscription plans created a recurring revenue stream, crucial for the company to emerge from its stagnation phase. To be more specific, by experiencing strong subscriber growth (reaching 1.6 million subscribers in Q4 2021) and incorporating a more DTC hardware sales approach, GoPro has managed to increase its direct sales to consumers to account for 32% of revenue in 2020 and 34% in 2020. Margins are also improving thanks to the renewed revenue mix, with gross margin reaching 36% in 2020, only to grow further to 41% in 2021.
The recurring nature of subscription revenue should reposition GoPro on a growth trajectory. Margins also look like there is room for further improvement, as the company says its subscription services maintain gross margins close to 80%. Provided aggressive growth continues in the services segment, GoPro should be able to operate with gross margins of 45-50% over the next two years.
Cash flow generation has also rebounded, with GoPro now delivering record amounts of operating cash flow. In 2021, cash from operations reached $230 million, up more than 100% from the prior year. The balance sheet is also getting stronger and stronger. Currently, GoPro holds $540 million in cash and short-term investments. Compared to its market capitalization of $1.42 billion, this number is simply impressive, but raises the question of how the company can use this excess cash to stimulate growth. A current ratio of 1.65x and a quick ratio of 1.38x should ease any near-term liquidity concerns. GoPro also appears to be under-leveraged, with long-term debt accounting for only a quarter of its cash or half of its cash generation from operations in 2021.
Finally, GoPro adopts a multi-channel marketing strategy that aims to increase customer reach. Including social media promotions, online advertisements, vlog product placement and endorsements from top athletes and influencers as well as a promotional presence at sporting events, GoPro should be able to familiarize more consumers with its product offerings. GoPro’s hardware distribution channels include e-commerce websites like Amazon and JD.com, retailers like Target, Walmart, and Best Buy, and DTC sales through the company’s website.
While GoPro has earned a bad rap for its failure to grow in recent years, valuation multiples have contracted, today offering investors an attractive value proposition as the company enters a more promising decade. . Currently trading at 9.7x P/E and 1.17x multiple P/S, the company appears inexpensive. The P/Cash Flow and P/B ratios also lead to a similar conclusion, standing at 5.98x and 2.23x respectively. GoPro’s enterprise value is significantly higher than the company’s market capitalization, thanks to a large stock of cash and low debt levels. As a result, a very low ratio of 6.11x FWD EV/EBITDA becomes another attractive point for investors. One thing that raises some concern could be an apparent increase in the number of shares outstanding in recent years.
While GoPro has a long way to go to regain investor confidence, it appears to be moving in the right direction, taking strategically sound steps to ensure longevity and efficiency. By focusing on service revenue through a subscription-based model, GoPro is creating an ecosystem of products that aims to attract and retain customers while improving business profitability. Given the current valuation, I would rate the action as a buy.