GoPro

 

Summary

Pros

Good balance sheet

Valuation is cheap

Debt is manageable and not growing

Low stock-based comp and dilution

Subscription based revenue is increasing

Product is good 

Cons

Growth is not consistent

Subscription based revenue is less compared to overall revenue

Limited product SKU's

Competition is more

Consumer durable and products will be less attractive during recession

What the company does?

GoPro, Inc. engages in manufacturing and selling camera and camera accessories. The firm offers a family of cameras, including its cloud connected HERO10 Black, HERO9 Black, HERO8 Black and MAX cameras. Its HERO10 Black camera offers 5,300 pixels (5.3K) video at 60 frames per second, HERO9 Black camera offers 5K video at 30 frames per second, and HERO8 Black camera can shoot video in 4K at 60 frames per second. Its MAX captures video in 360-degrees at 6K resolution and stitches to 5.6K. The company offers a range of mounts and accessories, either bundled with a camera or sold separately. The company also offers offer mobile and Web applications that provide a complete media workflow for archiving, editing, multi-clip story creation and sharing content on the fly. Its GoPro subscription service offers a range of benefits, including a camera protection plan and a platform that enables subscribers to easily access, edit and share content. The company also offers lifestyle gear, such as bags, t-shirts and other soft goods.

The company went IPO on 2014-06-26. And the stock plummeted ever since. From an all-time high of ~94$, it plummeted to ~4.8$

Financial performance - 

The dismal price drop is due to drop in earnings from 2016. Earnings were negative till 2020. 2021 saw positive earnings with positive OCF. Yet the stock keeps dropping. Second half of 2020 and 2021 saw a reasonable gains in OCF. Major problem is with the consistency of the OCF. There is pattern of a positive OCF in Oct-Dec quarter. And mostly negative to muted OCF on rest of the quarters. This could primarily be due to the holiday season sales. 

Balance sheet - 

Looks fairly stable with 948M of tangible assets and 146M of good will accumulated over time.

Total liabilities of 486M with 296M of it in current liabilities. Long term debt is 140M. Current assets are more than the total liabilities and company is no way stressed. And long-term debt is not increasing a lot in recent years which is a good thing.

One important thing to note here is a high net income in Q3 2021. This is the primary reason for the increase in tangible book value. This needs more explanation.

Another good point about this company is it doesn't do a ton of stock-based compensation that dilutes the shareholders.

Holiday quarter expectations (Oct - Dec 2022) - 

As per the recent Mastercard transaction data, electronics sales were down by about 5% during this holiday season. So not expecting a huge OCF growth this season. Also, the high paying job losses doesn't help it too. There should be more high-income people spending m cameras. And in general fear of recession would not auger with this company too. Given this is in consumer discretionary industry, the products should be getting less attention. Also reducing digital revenues would be putting the content creators under pressure. Motivation for content creators investing in a camera would be less. 

Valuation - 

Market cap - 776 M

PE - 9.91

PF - 5.54

Earnings yield - 10.09% 

FCF yield - 18.03%

Current 10 yr yield - 3.8%

Comparing with the bond yield the current valuation looks very attractive. 

This looks fairly cheap. However other things need to be considered. Once we have this quarter earnings (which we expect to be low) and previous three negative to average quarters, the valuation paints a different picture. Let's look at the quarterly earnings and FCF.

Q4 21' - 52.626 M

Q1 22' - 5.685 M

Q2 22' - 2.519 M

Q3 22' - 17.57 M

TTM Earnings - 78.4 M

Assuming the worst case happens and earnings would be 10% of the Q4 21. Total earnings would be 31M but the OCF/FCF turns negative. Earnings yield in this case would be 4% which doesn't give us a margin of safety. In the short term, given the current economic conditions, the stock price would be under pressure. Valuation drop to 500 M would make the stock look attractive short term.

Quarter Earnings OCF FCF

Q4 21'  52,626 163,848 163,143

Q1 22'  5,685 -73,407 -73,927

Q2 22'  2,519 12,856 12,082

Q3 22'  17,570 40,736 38,825

Total 78,400 144,033 140,123

Case 1  80% Q4 21' 0.8 67874.8 111263.4 107494.4

Case 2 50% Q4 21' 0.5 52087 62109 58551.5

Case 3 10% Q4 21' 0.1 31036.6 -3430.2 -6705.7

Long term - 

Ten years down the line, business looks cheap, assuming the earnings/FCF could grow by 7% on today's earnings/FCF.

On the downside, product SKU contains limited items and competition is picking up. At the end of the day, it depends on how the management wins the market share among competitors. I prefer to be cautious here. 

Also a good point is they have moved to a subscription based model which charges for the Quik editing software. This will help in smoothing out the cashflows to certain extent.

Comments as a user - 

It is a fairly good camera for motion videos. For pictures, it offers only a 2x zoom and doesn't look that attractive to me. Provides good set of accessories. The photo/video editing tool sounds good.