GoPro Inc. is the latest consumer gadget company to go public with what can only be described as a spectacularly successful share offering. The IPO happened in late June at $24 (U.S.) a share, and within a week, the shares had reached a high of almost $50. As I write this, the shares are now trading at about $36, or 50 per cent higher than the offering price.
I have to admit, I’m actually tempted to buy one of GoPro’s rugged digital cameras. The product is very easy to use, shoots high-quality HD video and can be mounted to anything from a surfboard to a bike helmet to self-capture video of your favourite hobbies and sports. I think my kids would love to shoot video while bouncing on their trampoline or swimming underwater.
But am I tempted to buy the stock? That’s an entirely different question. It’s okay to love a company and its products yet not feel the same about the stock, or vice-versa.
What I like about GoPro’s business is how it has single-handedly created a market for action-oriented digital cameras. I’ve seen articles refer to the company’s 94-per-cent market share in the niche, and I believe it. GoPro is the only product in this category that I’ve ever seen for sale or in use by a customer.
Having started the company in 2004, chief executive and founder Nick Woodman has built a powerful and sustainable brand, I believe. If you want the best digital SLR camera for photography, you buy a Canon or a Nikon. If you want the best self-captured sports video, you buy GoPro.
Growth has been fairly impressive too. Revenue for 2013 was $985-million, up from $234-million in 2011. The company is nicely profitable, but over the past two years it has clearly ramped up R&D and selling expenses faster than revenue has grown. Its gross margin has also fallen from 52 per cent in 2011 to 37 per cent last year. As a result, net margin has fallen from almost 11 per cent to only 6 per cent. Still, a 37-per-cent gross margin is quite healthy, the competition doesn’t seem anywhere close to hurting GoPro’s brand, and I expect it should be able to recapture some of the lost ground in the coming years.
At its $24 initial public offering price, I calculate the real market capitalization of the company (using the diluted share count) at $3.5-billion. At this price, the stock would be trading hands at 50 times 2013 earnings. For a company that is entirely dependent upon hardware sales and has very little product diversity, it feels like the top end of what I’d be willing to pay. For example, if the company doubled sales and pushed its net margin 50 per cent higher (from 6 per cent back up to 9 per cent), earnings would triple and the $24 share price would translate into a much less risky P/E ratio in the high teens. I’m betting GoPro can accomplish this within a three- to five-year time frame. But to generate a healthy return for shareholders, there needs to be a path to even better growth in the long term. Since the stock has climbed significantly higher than the IPO price, the math is even more challenging.
Right now, GoPro sells hardware that, unlike smartphones, doesn’t need to be replaced very often and has a much more niche appeal. The company also states its desire to become more of a media company by streaming user-generated content to the world. If I wanted to invest in a media company that will benefit from this user-generated video content, I’d simply buy Google, which owns YouTube.
GoPro looks like a great company making a great product. But I’m not buying the stock based on its potential to become a media company. Instead, I’m more interested in signs that these tiny cameras are becoming popular en masse, for all sorts of other activities. If I believe that Canon and Nikon will inevitably be forced to compete because this market is growing immensely, that’s when to consider buying GoPro.
Until then, this is a good example of loving the product, but not the stock.