January 17

GoPro Has Massive Upside in VR

It has been astounding to see the fever pitch negativity in the media about a company that is involved in the most promising technology trends of the next decade. Camera drones as well as three dimensional and virtual reality cameras are all currently under development by action camera maker GoPro. The company initially fared well in the months after its Spring 2015 IPO, rising from $24 to $64.50, but in the second half of last year the stock plunged as sales of GoPro’s Hero4Session camera came in slower than expected. Frothy equity markets boosted this stock to obscene valuations last year, but at current levels it looks promising.

gprochartjan16

2015’s horrible stock price performance is at the center of a slew of recent headlines about the company being a one trick pony with little chance at survival against deep pocketed major electronics manufacturers. This sentiment was accentuated with this past week’s layoff of 7% of GoPro’s workforce and pre announcement of Q4 sales numbers that disappointed. The company said it expects Q4 2015 revenue to be $435 million after forecasting $500 million to $550 million in mid October and down from $634 million in Q4 2014.

Many investors seem to see these developments as the death knell for GoPro. Sales are in decline and jobs are being cut, but things are not as simple as various media outlets let on. GoPro released the Hero4 Silver and Hero4 Black, their high end and most expensive models in mid 2014. The fact that sales declined are not exactly surprising given that GoPro only released one product in 2015 that management admitted was mispriced and mistimed. The Hero4Session is a smaller ice cubed camera that initially released in July with a $400 price, but was cut to $200 after slow sales.

The media was quick run with the idea that the failure of the Hero4Session is a sign that the overall market for action cameras is  a  fad niche that cannot sustain such a rich valuation on GoPro’s shares. This is a valid conclusion, but does not mean that at $11 per share it’s still a bad investment. There were a host of initial public offerings in the last two years that came to market vastly overvalued and already too far into their product cycles to offer buyers of the shares a compelling opportunity. Companies like Twitter, Box, Shake Shack, Yelp, Pandora and Fitbit all come to mind. These companies went public, had a temporary euphoria period then fell into a relentless decline as reality set in. This decline stage is where we find GoPro shares.

gproperformanceQ3

What sets this company apart is profitability, a strong balance sheet and a valuation below most S&P 500 stocks. The GoPro Karma drone is set for release in the first half of 2016 and rumored to be bundled with a new updated Hero5 camera. The consumer electronics show in early January also saw GoPro CEO Nick Woodman take the stage with Youtube Chief Business Officer Robert Kyncl to reveal  a partnership between the two firms to bring more 3D content to Youtube using GoPro’s Odyssey 3D camera rig that was released in November 2015. Woodman understands that the next wave is VR, and is positioning the company to create the cameras content producers will need.

The company has no long term debt and $512 million in cash while sporting only a $1.5bn market cap and a forward price earnings ratio of 9.75. 2015 sales should come in around $1.62bn putting the price to sales ratio below 1. The company is almost laughably cheap at the current price given how big of an opportunity virtual reality could be. A $300 million share buyback is also underway that started last quarter and there will be more information on just how much of that has been spent when earnings are released the first week of February

It is unfortunate that investors that bought into many IPOs in 2014 and 2015 and got burned, but just because central banks contributed to a speculative private valuation bubble doesn’t mean there isn’t huge opportunity out there in these beaten up companies.

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