GoPro: Capturing Distressed Action-camera Maker’s Comeback [SOLD]

By David Shakirov

Update 03/11/21: The author recommends disposing of this stock. GoPro saw a dramatic rise in its price from the pandemic lows of $2/share to highs of $12-13 in the aftermarket last month. At this price, GoPro is almost fairly valued. However, there are concerns over management’s ability to cut operating expenses to $250m as promised (the new guidance is $305-315m) and to minimize churn on their new GoPro + subscription service. GoPro could be a $15-20 stock, but given our gain of 130% and the foreseeable risks, Insight recommends readers to sell their shares. 

In 2002, Nick Woodman strapped a cheap plastic camera onto a wristband and shipped the homemade prototype to a manufacturer in China. Twelve years later, GoPro went public at  a $3B valuation, under the premise that everyone was in the market for its action cameras. Over the course of the next four years, GoPro failed to release new cameras, began pitching itself as a “media company” and manufactured a drone that turned into a commercial disaster. Its market value plunged from $90/share to $3.38 earlier this year.

Woodman (pictured above), a major shareholder in the company, began to reorganize the business back to its roots as a consumer electronics company. He cut corporate costs drastically (OpEx margin from 68% to 38%), banked on best-in-class high end products, and offered professional video tools for its users. GoPro plans to continue on this path by expanding its TAM (total addressable market) and top line by products like VR, while improving gross margins and settling into bottom line profitability. Even better, Nick Woodman spoke out recently and said that GoPro “crushed” the Black Friday + Cyber Monday shopping season, beating last year’s revenues by a whopping +120%, capturing 97% share of the action cam market.

GoPro’s main pitch to investors is its massive operating leverage stemming from growth opportunities over the next ~3 years. GoPro plans to (1) cut its operating expenditures from current levels (~$400-500M) to roughly $250M, (2) focus on growing ASPs dramatically with a focus on high-end cameras. (3) moving DTC to expand margins, and (4) banking on high margin recurring revenues from its GoPro Plus subscription service.

Let’s dive deeper into how these growth opportunities will continue to play out:

GoPro is huge on cost cutting — an initiative to run lean and create huge operating leverage. With operating costs of ~$400m/year, Nick Woodman announced he is cutting expenditures and headcount to manufacture roughly $150m of savings per year. If only half-baked and translated to $75m of profit at a low 10x P/E multiple, this initiative alone values GoPro above its current market value.

GoPro is focusing on high end (and high margin) cameras (like the Max, which retails at $499 vs. $299 for cheaper GoPros) which significantly increases ASP (average selling price). Even better, the demand for these higher end cameras is up 90% YoY, with cameras above $300 ASP representing 95% of sales. The new Hero 8, a high end offering, had 40% more first-month sales than any GoPro offering in history. Conservatively, if high-end cameras can improve GM by 500bp, that is roughly $60m of profit to be realized.

A shift to DTC (selling on instead of Walmart/Target/etc.) should expand profitability significantly, as well. The company mentioned that gross margins on the GoPro website are 500-1000bp higher (north of 40%). Selling directly on the website also improves cross-sell opportunities (e.g. GoPro Plus subscription, accessories, etc.) and improves data collection on what customers want and how they shop. The margin improvement alone, if achieved at the lowest bound, should bring roughly $50M of profit into the business.

GoPro is also expanding its their new subscription platform, GoPro Plus. Plus costs five bucks a month and gives users cloud storage and small discounts on accessories and cameras. It’s a high gross margin recurring revenue stream that builds loyalty. At the current rate, subscription numbers are growing at +20% quarter-on-quarter and GoPro is guiding $60-70m of recurring revenues from this service. At conservative 70% margin, this adds $40m of profit to the business.

That’s $225m of profitability if you’re keeping count.

Some other less quantifiable but still important catalysts —

(1) Potential of expanded TAM, by venturing into VR or other verticals. Woodman cites a magnified $13B TAM in GoPro’s future.

(2) Its brand name is a significant advantage. GoPro’s new products are backed by a reputation of “best-in-class”. More generally, consumers rarely “shop around” for action cams — they simply buy GoPro (which is why it captures 97% dollar share of the action cam market).

(3) Acquisition potential is notable, as well. Major tech companies are sitting on a pile of cash (like Apple’s $250B piggy bank, for instance. Buying a best in class tech hardware company like GoPro that makes sleek and sexy electronics might make some sense. Apple is reported to release a major piece of VR hardware in a few years, while Google just bought distressed consumer electronics company Fitbit. Even an LBO from management would not surprise me.

If we add all of the potential profitability as noted above, we can back into a $225m operating income business in just a few years. We are not even including the brand name, acquisition potential, or TAM expansion. By that hyper-conservative logic, GoPro, a premium consumer electronics and technology company is now trading at 3x 2022 EBIT. That’s right, a tech company at a 3x EBIT multiple. A bargain if there ever was one. Or, as Peter Lynch would say, a four-bagger home run.

Recommendation: BUY at the current price of $4.02