GPRO and Damodaran's analysis

Hi all,

GPRO has been mentioned a few times on this board. The stock flew after its IPO but has lately been crushed back to near the IPO level. There’s a fair bit of scepticism … and I was wondering if this might be an opportunity to take a position. It reported FY 14 results not too long ago. See the release here:
http://investor.gopro.com/releasedetail.cfm?ReleaseID=895085…

Here’s a quick summary of the 2014 non-GAAP numbers:
o Gross margin of 45.1%, compared to 36.9% in 2013

o Operating income of $259.6 million, or 18.6% of revenue, an increase of $148.9 million year-over-year

o Adjusted EBITDA of $293.4 million, or 21.0% of revenue, up 119.4% year-over-year

o Earnings per diluted share of $1.32, up 164.0% from 2013

Those look like outstanding numbers. Who doesn’t like 150%+ earnings growth? With trailing non-GAAP eps of $1.32 and a stock price around $40, we get a trailing PE of 30. In my quick look, I didn’t find anything on Q1 2015 guidance, so may be their guidance is weak but still I would think they would be able to grow earnings at 50% rate or so, given what they have achieved in the recent past. So, I need to look more into this.

On a related note, I also found a post by NYU business professor Damodaran. He’s more of a value investor but his posts are very interesting. He studied GoPro in Oct 2014. His post his here:
http://aswathdamodaran.blogspot.com.au/2014/10/go-pro-camera…

One of the things he noted in his post is how GPRO was (then) being valued as a social media company. While it’s possible that the company will transform into a media giant, I still don’t see the path to that happening. Anyways, Damodaran thought that the stock was more or less fairly valued in the mid $30’s, and today we are getting to that point. He sees the company more as a ‘action camera’ seller not as a social media company. Anyways, his post is always interesting to read.

I have my doubts on GPRO. I just can’t see a very narrowly focused electronics company having any form of moat. Proponents often point to the staying power of Apple but I 'm not sure if GPRO exhibits the hardware/software finesse of Apple products. And, I do think that the smartphones will just become more and more capable over time, and they will start providing ‘action camera’ capabilities in the near future. What else will iPhone 8 have? We already see movement in this direction. The new iPhone supports 120 fps recording. The iPhone 6 supported 60fps recording. So, over time, camera improvements are bound to happen and why carry an additional piece of bulky hardware when you can strap on your phone and get similar results. Anyways, that’s my bear case but from a pure numbers point of view, GPRO looks enticing.

Has anyone looked into this in any detail? Any thoughts?

Anirban

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I want a GoPro camera so when I catch that record bass, I have proof. I would strap it on my head but how would I strap my phone to my head?
I also would not want to lose my phone or drop it the water.

I may be a buyer of a GoPro camera and of GPRO.

I watch Amazing Race and I’m amazed at the quality of video I see with these cameras. I think that will improve with time.

I want one.

Wayne

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I 'm not sure if GPRO exhibits the hardware/software finesse of Apple products.

The new iPhone supports 120 fps recording. The iPhone 6 supported 60fps recording. So, over time, camera improvements are bound to happen and why carry an additional piece of bulky hardware when you can strap on your phone and get similar results.

[my bold]

Great post, Anirban.
Yes, Damordaran is very good; appreciate the link [will read it next].
My understanding of the camera is that it is superior because of its hardware and software capabilities. Outstanding, even. No, one wouldn’t want to carry another piece of equipment if they didn’t have to. The GoPro is a specialty camera. It does one thing and it does it
very well. The iPhone does tons of things and does them very well. GoPro has a much smaller niche market. I don’t know anything about
the specs of the iphone or gopro, so I’m asking, do we really think
an iphone will be able to take the same quality pictures as GoPro? Do
they even want to?

Have you seen any of GoPro’s videos? They’re really something!

https://www.youtube.com/user/GoProCamera

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so I’m asking, do we really think
an iphone will be able to take the same quality pictures as GoPro? Do
they even want to?

I have both a GoPro and an Iphone5. I really don’t see the Iphone ever being able to fit into the niche that GoPro has built for themselve. I would never subject my phone to the type of abuse that my Gopro gets. I use it for fishing, jet boating on river, things like that. I am figuring now how to attached to a crab trap to see the trap in action in 60’ of salt water. I would never do that with my phone, too much to lose (data) if a seal gets curious. Also, it would be difficult to design a waterproof case for an Iphone that would let you use the touch screen under water if you were scuba diving or something. The GoPro is smaller than the phone and there are a multitude of attachment options for more or less hands free operation. I have chest harness, suction cup for windshield, head harness and even a little clip that quickly attaches to a ball cap worn backwards. The power and records buttons are mechanical and can be turned on and off easily even if tha camera is on your head and you can’t see it. It would be difficult to do something like that with the Iphone type of menu.

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I don’t own GPRO, not sure if I will uy any, but TMF is pretty hyped on it. Don’t know if you subscribe to any of the TMF paid services, but they have run several pieces on GoPro’s “eco-system” (BTW, I’m beginning to hate that term). Anyway, it’s more than just a video camera, they’ve developed a lot of editing s/w they make available so that it’s easy to turn footage into a nicely edited video with an audio track. They also have a searchable database for posting videos.

Point is, that the company is about more than just cameras which, as you observed, do not provide much of a moat. That’s where the notion of social media company comes from.

Also, insider ownership is huge. The owner, a sports fanatic and hyper-addicted to his camera and business, didn’t sell shares after the IPO lock-up. His dad (an investment banker) also owns something like 4% of the company and didn’t sell any shares.

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Go Pro also has it’s own channels on streaming services like roku, xbox, some smart tvs, and stuff like that. And people actually watch them too. Average viewing time is around 25 minutes for people that do.

I’m not sure how that monetizes, but it is definitely an engaged customer base.

no position yet, but considering one

All,

Thanks for chiming in with your thoughts.

I see the bull case as:

  1. GPRO cameras are specialised and useful for things that can’t be done using the phone

  2. GPRO provides software that makes it easy to edit and turn footage into interesting films. The average viewing time of these clips is sort of proof that this might actually be working.

  3. Active lifestyle is a possibly a mega trend, one that the company can ride for a long time.

  4. Insiders have big stake in the company and haven’t sold out with the IPO. They haven’t sold following expiry of the lockup period. Good. Engaged founder-led management is something I like a lot.

Now, to the bear case, which I see as some of the below noted points:

  1. I think discounting smartphones out of the equation is a mistake. I know some in this thread argue that the smartphone is a multi-purpose device, one with which we are careful and not willing to take risks. That I get, but I think that over time the smartphones will naturally evolve to allow better video capture and come with all sorts of contraption that will allow it to be used like a ‘action camera’ much like GoPRO. This seems like a natural evolution of the phone. Just see how it has turned from a device taking crappy digital photos to one taking excellent digital photos … some argue that in a few years the SLRs and the like will be pretty much dead. Many iPhone 6 plus users seem to have thrown their SLRs in the closet (this is anecdotal … based on a sample size of 8 people I know with both new iPhones and SLRs).

  2. The hardware seems like commodity. What stops others from jumping into the market?

  3. Unlike a smartphone which is a multi-purpose device, and thus has more use in being upgraded with product upgrades, a GoPro camera which is essentially just for taking fun videos wouldn’t probably see as many upgrades with product refreshes.

  4. The social media angle and the potential of turning GoPro into a media company seems like a hype. Most Telcos want to transform into a media company because that give them an opportunity to have more durable moats. How many Telcos have succeeded? I can’t think of one. In a similar vein, I see the allure of turning GoPro into a media company but really how many would want to pay to watch random videos? I suppose GoPro could get some monies from a YouTube channel but that hardly seems like a pathway to being a media company. As pointed out, it is this “eco system” stuff I don’t get and understand.

Anyways, some of the above might be provocative but I 'm hoping to hear from many more because some of the bull points do appeal to me and the valuation looks reasonable.

Anirban

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Point is, that the company is about more than just cameras which, as you observed, do not provide much of a moat.

I know zilch about the company beyond reading that EPS release.

couple questions

1 - does GPRO quantify the social aspect of the business model? I haven’t looked at the K. UA has just bot a few digital companies at absurd prices, but how much revenue of that 1.4b is actually social media related?

2 - any idea the replacement cycle for GPRO or how often those things break? And I’ll admit I know zippo about the cost of those things, but is the technology proprietary? I don’t hear about a lot of no-no-Go-Pro cameras so what accounts for the better mouse-trap?

Again, I know zilch.

One thing I do know - I wouldn’t use Non-GAAP. The differences is all shareholder comp and it is ludicrous IMO to ignore that.

thanks for posting - any help appreciated

glW,

dumb question, but why has the stock been crushed lately?

couple fuzzballs

*Xiaomi on Monday said that it has begun selling a GoPro knockoff by partner Xiaoyi in China for $64.
Analyst says comparable price for a GoPro is $130. Not the first knock-off in China. I have no idea how much they do there

*It is worth noting that consensus estimates assume GoPro will grow revenue 24% YOY in 2015.
Have no idea if this is company or analyst supplied - aggressive or conservative

some risks

*We also note that GoPro cameras have started to
become an ubiquitous fixture in just about every major electronics and sporting goods retailer in the U.S. The camera has also started to show up in airport kiosks and untraditional camera
retailers, such as Guitar Center (there is a version that can be attached to instruments). Thus, there is a risk that the distribution footprint is beginning to reach a point of saturation.

*Very seldom do we see consumer electronics brands hold above 90% market share in their categories, which GoPro currently
has. That is because, generally speaking, the components to make the device are readily available from a handful of merchant suppliers. In the case of GoPro, a competitor can easily source
the video encoding chip from Ambarella (AMBA, Buy, PT$35), an image sensor from a handful of suppliers, the Wi-Fi chip from a handful of suppliers and the memory chip from a handful
of suppliers. Just in terms of hardware, there is very little inside a GoPro that can’t be replicated.

*Media business is totally unproven and could be an expensive experiment that doesn’t work. We know this – no one has ever done what GoPro is attempting to do, which is to generate
a revenue stream from the videos captured on its cameras. Probably the closest example of a consumer electronics product that allowed its maker to generate media revenue is Apple with
iTunes (music first, then movies, games, apps, books, newspapers and magazines). This scenario, however, is completely different. GoPro is not selling content to users – it is taking its users
content and packaging it in a way it can monetize (via ad revenue attached to views).

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“One thing I do know - I wouldn’t use Non-GAAP. The differences is all shareholder comp and it is ludicrous IMO to ignore that.”

Would you say the same thing about Celgene - large difference there between GAAP and adjusted EPS.

sw

sorry last post - GPRO gets 10% of sales from Asia

sw - after your run of great picks lately (did I listen to your prompting on DHIL or did I just ignore it like a dummy I am?), I’ll take your word for what you decide on Celgene.

if it matters, I usually give companies some benefit of doubt but not with stock based comp. But accounting knowledge is hardly my forte, esp. when it relates to anything acquisition related which is where my understanding pretty much stops

Well Value Line and most other sources I see are using the GAAP, although some investors cite the adjusted in defense of the high valuation.

Very unlikely I would buy CELG in the absence of a large price correction.

sw

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it is hard

I looked and PCLN today and was dazzled by the NG and G numbers. just crazy. I HATE it when they do stuff like that. I don’t know why VL is inconsistent like that, but Morningstar does it too. I asked Morn about it once and they sorta suggested they were aware of the problem but it was essentially too hard to change the numbers. My interpretation - and the question was just aimed at one guy.

Problem is that w/some like CDW they were doing debt refinancing, had some IPO costs, and in general had a lot of moving parts between NG and G. So if you just went with a ‘I’m a GAAP guy’ you really weren’t looking at it correctly. My opinion at least. So - as I suspect you already know - you do this on a case by case basis.

I think this sort of “ignore the stock based comp” is what you get in a bull market - people are more apt take lying like this without blinking. It is hard whether to be a sheep and accept it or not, but again - accounting knowledge isn’t where I get a gold star. Plus, I think it was NoMoreShort who pointed out to me when I worried about excessive option grants that, short-term, nobody cares if the earnings are good.

you gotta do what you are comfortable doing

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I first looked into GoPro when the stock price crashed by over 50% from $93.70 on September 30, 2014. Price matters! Damodaran says:

Even if GoPro can establish a brand name advantage (by being the first one on the market), I don’t see any potential networking advantages that GoPro can bring to this process that will allow it, even if successful, to control a dominant share of this market, as the market gets bigger.

The above comment must be a reaction to the notion that GoPro is a social media product. It’s not, it’s a consumer electronics gadget. Then there is the comparison to the iPhone. iPhones will out sell GoPro cameras by ten to one on volume and 100 to one on revenue. GoPro is R&D heavy with a “smallish” base to pay for it. Apple’s “User Interface,” it’s real product, is huge if you consider Macs, iPads, iPhones, and iPods. No wonder Apple is so profitable.

Currently I have four stocks on my wish list but I doubt GPRO will make it


AIRM   Air Methods Corp.
AMAVF  Arcam AB
AWAY   HomeAway, Inc.
GPRO   GoPro, Inc.

One does not compete with hundreds or thousands of smart investors but with a composite investor known as Mr. Market. As an individual investor he is the only one you can buy from or sell to. If you buy at half price you get twice the yield. Damodaran makes a distinction between valuation and pricing.

A Pricing of GoPro
In keeping with my argument that much of what passes for valuation in practice is really pricing, let me make the pricing case for GoPro. To price a company, there are two fundamental questions that have to be addressed: who (or what companies) you are pricing your company against and what metric (revenues, book value, earnings etc), you will use in the comparison.

The essence of pricing is that you use the market pricing of comparable assets/firms to determine a fair price for your asset/company. There is, however, a subjective component to determining these comparable investments, and that comes into play with a company like GoPro, with the following possible choices.

Valuation is really difficult. There are so many factors to take into account, some of which we don’t even know exist, and the interactions between them are so complex, that any hope for accuracy is a pipe dream. Valuation is possible for old, established businesses but not for new concepts like GoPro. Within certain valuation standards (P/E, P/S, P/B, etc.) it might make more sense to compare a stock against itself. In other words, against its price chart. At over $90 the price of GPRO was not sustainable. At half the price it might be interesting if you like the business. I’m not impressed by the business as an investment.

Fool MartianRtns asked “dumb question, but why has the stock been crushed lately?” I don’t think the question is dumb at all if you are interested, as I am, in pricing. Explaining day to day moves is mostly guesswork but long range price changes are a reflection of the stock’s intrinsic value.

Denny Schlesinger

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I forgot to mention a curious coincidence about Damodaran’s article. It was published on October 14, 2014 and his son posed the question two weeks earlier, say October 1. That two week period frames the stock’s top and up to the correction to around 70. Damodaran wasn’t seeing at what we see today, the bull trap to 85 before the big drop.

http://softwaretimes.com/pics/gpro-3-23-2015.png

Damodaran addresses the momentum issue:

Thinking I would have some sage advice on where to invest his money, he asked me for some stock picks and I almost suggested that he put all his money in GoPro, a choice that is clearly at odds with the prudent investing practices of diversification and perhaps with conventional value investing precepts. While GoPro is not the investment I would recommend for my son as his Roth IRA investment (with real long money and a long time horizon), in a game with a five-week window, where the winner takes all, momentum will beat out intrinsic value and diversification will be more hindrance than help. (Note that momentum fairy was in GoPro’s corner at the time, and has taken a break in recent days.)

http://aswathdamodaran.blogspot.com.au/2014/10/go-pro-camera…

What would Damodaran have suggested based on the current chart? I’ve already said I have now put GPRO on mu wish list.

Denny Schlesinger

3 thoughts on this one guys…

  1. I am currently diving in Layang Layang off Borneo Malaysia in a real pro resort. Apart from me - absolutely everyone has a GoPro camera

  2. Go Pro are not on my list. I cannot see the repeat business but I can see a load of competition coming and not much of a moat.

  3. I do think tho that Hi Def video cameras are going to be massive across a bunch of sectors including CCTV, security and defence. I expect the personal sports wearable segment to be relatively small. My play across these sectors are: AMBA for the chip and Avigilon. I don’t think GoPro is the play here although admittedly it has the sexy tech IPO story.

Ant

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Go Pro are not on my list. I cannot see the repeat business but I can see a load of competition coming and not much of a moat.

This is my main reason to not invest. Can be a big mistake but there are indeed a bunch of competitors although none are as good as GoPro in the “action camera” market.

Sony has few products.
http://www.cnet.com/au/products/sony-action-cam-mini/
(cnet gave this out 8.4/10)

GoPro Hero4 Silver also got 8.4/10
http://www.cnet.com/au/products/gopro-hero4-silver/

Kogan has one as well.
http://www.cnet.com/au/products/kogan-full-hd-action-camera/…

Xiaomi has also announced an action camera squarely aimed at GoPro.
http://gizmodo.com/this-xiaomi-action-cam-beats-a-gopro-hero…

Given the onslaught of manufacturers gunning for a piece of GoPro’s market, I have a hard time seeing how GoPro might be able to defend its turf and maintain its pricing power. GoPro is no Apple. It doesn’t have the ecosystem that Apple has, and the ecosystem is one of the key reasons why Apple is able to get people to buy their hardware.

It’s interesting to note that Apple recently got a patent for an action camera that could also be controlled via a smart watch. See here:
http://techcrunch.com/2015/01/13/apple-patents-a-wireless-ac…

The Apple patent explicitly notes ‘GoPro’ and so called design flaws in GoPro cameras. Apple has also acquired a action camera patent from the bankrupt Kodak. Now, I know that Apple routinely gets patents on things it doesn’t intend to do anything with in the near future. But, may be, Apple is interested in getting into this market. A company like Apple is able to defend its position in the market using its closed ecosystem to tie people into the ecosystem … the phone, tablet, computer, watch, and action camera all nicely talk to each other and seamlessly exchange information.

Apple could be making an action camera on its own or could simply look to acquire GoPro and fit it into its ecosystem.

So, there, I think I went of course with my ramblings, but after writing this I feel even better about my position in Apple. And may be, a speculative position in GoPro might be fine given the shares seem to trade at a not so high premium now. I have to see how much it would cost to buy leaps with strikes near the current stock price.

Anirban

I am passing on GPRO due to too many competitors, smartphones becoming more action/waterproof, Apple’s announcement and Google’s DropCam acquisition and GoogleGlass software knowledge (why couldn’t they take those two pieces of knowledge and develop an action camera? They’re into drones, which will certainly utilize them.) In the end, I see Apple, Adobe and Google profiting on this technology.

One thing that hasn’t been mentioned is media software. Apple bought Final Cut Pro back in 1998. It’s a sophisticated video editing software used in film schools and even our local high school uses it in video film classes. GPRO does own a high-end video editing software, but Apple owns the Mac Pro. What a bundle it would be if Apple had a camera. And, having students utilize their package from the start gives Apple the learning curve edge. On the low end, kids are already very familiar with iMovie, so adding a more sophisticated camera to a smartphone seems like an easy sell and would probably present a means for additional profit on a smartphone; at minimum, a smartphone/action camera would drive a phone upgrade.

Adobe has it’s own video editing software and has just gotten into hardware, in a small way. Perhaps they would acquire GPRO. It certainly would be a good fit to their Creative Cloud.

cautiousone

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