Don’t Jump Into GoPro Stock as a Value Play Just Yet (GPRO)

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After falling 60% from its post-IPO high, GoPro’s (GPRO) stock price may seem cheap right now. Investors may be tempted to think that GPRO couldn’t possibly fall much lower — that GoPro stock will return to its former highs if they just hold tight.

gpro stock gopro stock gopro hero4But before you go piling into GoPro stock as a value play, consider the contrary: GoPro’s stock might be correcting to reflect fair value.

To decipher which view is correct, we first need to determine fair value. Using the multiple that Apple (AAPL) reportedly paid for Beats, we get a figure of 2x sales. Like GoPro, Beats was primarily consumer hardware/electronics, and was growing at a similar rate, thereby making 2x sales a fair value multiple for GoPro.

GoPro is expected to earn $1.93 billion in revenue this year, with just about all of that coming from hardware sales (cameras and accessories). This would be good for a year-over-year growth rate of 38.7%. And analysts expect GoPro to grow another 20% in 2016.

So, 2.0 times $1.93 billion in sales equals a fair value of $3.86 billion, significantly less than the company’s $4.3 billion market capitalization. If we apply the same multiple to GoPro’s expected revenue next year, then the company’s current valuation would be in line with fair value. However, that would be based on next year’s fundamentals, and suggests minimal stock upside over the next 12 months.

The Wrinkle in the GoPro Stock Valuation

With that said, the wildcard for valuing GoPro stock is its media business, which is essentially a YouTube channel and the company’s attempt to license content captured on GoPro’s hardware.

Since GoPro’s IPO, management has tried to sell investors on the promise of its media business. However, a YouTube channel with 3.3 million subscribers, roughly 70 million monthly pageviews and mostly third-party content captured on GoPro cameras doesn’t seem particularly valuable.

Specifically, GoPro’s channel doesn’t have nearly the volume of views as Maker Studios (6.5 billion monthly pageviews, 380 million subscribers) or Fullscreen (4 billion monthly pageviews, 450 million subscribers). Like GoPro’s YouTube channel, Maker Studios and Fullscreen act as a platform for content creators to publish video content on YouTube, and both reportedly have billions of views each month as two of YouTube’s top content hosts.

Despite each channel being far larger than GoPro’s, Maker Studios was acquired for well under $1 billion by Disney (DIS) and Full Screen was bought for about $300 million by a joint venture between AT&T (T) and Chernin Group.

Using those deals as rough guidelines, GoPro’s media business can’t be worth more than $500 million at fair value, and that’s being generous.

The bottom line: After the massive selloff, GoPro stock still doesn’t look cheap; instead, it seems fairly valued based on next year’s expected performance. While GoPro may be volatile and experience a brief period of big gains over the next year, it has minimal fair value upside over the next 12 months. Avoid GoPro for now.

As of this writing, Brian Nichols was long AAPL and T.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/gopro-time-buy-gopro-stock-one-month-45-loss-gpro/.

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