Don’t Buy GoPro Inc (GPRO) Stock, Buy Fitbit Inc (FIT) Instead

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Some observers see think GoPro Inc (NASDAQ:GPRO) is an undervalued company in the midst of a turnaround, while others, such as InvestorPlace writer Tom Taulli, hold more bearish views on GoPro stock. I belong to the latter camp.

Don't Buy GoPro Inc (GPRO) Stock, Buy Fitbit Inc (FIT) Instead

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GoPro released its first-quarter earnings report on April 27, beating expectations on revenue by $10 million and posting a loss a penny better than predicted. But the market was not too impressed: GoPro stock fell 4.2%.

I recommended Fitbit Inc (NYSE:FIT) stock in January, and I still think the potential rewards outweigh the risks … but not true for GoPro stock. Fitbit looks much better than GPRO from a risk/reward standpoint

Both are companies in the wearables sector and both are currently bleeding money. But I would draw two distinctions between them — Fitbit can sustain its cash burn longer and FIT stock trades at a lower multiple than GPRO.

GoPro vs. Fitbit: Cash Burn

GoPro and Fitbit both are unprofitable. Both Fitbit and GoPro were last profitable on an annual basis in 2015. However, Fitbit turned a profit in the third quarter of 2016, one year later than GoPro, which last saw profits on a quarterly basis in the third quarter of 2015.

The two companies also have negative free cash flow. Both were free cash flow positive in 2015, but GoPro’s last quarter in the black ended Dec. 31, 2015. Fitbit’s last quarter with positive free cash flow ended a year later, on Dec. 31, 2016.

For Fitbit, the situation looks much more favorable.

Fitbit lost $60 million in the quarter ended March 31, 2017, with $726 million in cash and short-term investments. At this rate, Fitbit could continue for roughly 12 more quarters before it needs to raise more money.

GoPro, on the other hand, lost $111.15 million in the same quarter, and only has $74.88 million left in cash and short-term investments. This means that it can finance only one more quarter before it has to take on debt. For this reason, Goldman Sachs analyst Simona Jankowski downgraded GoPro stock in March, lowering the price target to $6 a share, down from $8.54 a share now.

GoPro vs. Fitbit: Valuation

Despite having an arguably weaker financial position, GoPro trades at a higher valuation than Fitbit. GoPro trades at 1.02 times sales, while Fitbit trades at 0.7 times sales. Fitbit trades for 1.88 times cash, while GoPro trades at a multiple of 16.56. What’s more, GPRO stock changes hands for 3.34 times book value, compared to just 1.35 for Fitbit.

Fitbit also beats GoPro on more conservative measures of valuation. You can buy Fitbit stock for 2.07 times Fitbit’s net current asset value, the difference between current assets and total liabilities. GoPro stock, on the other hand, trades at a multiple of 35 times net current asset value.

On the most conservative metric, net-net working capital, which is the liquidation value of the firm, Fitbit also beats GoPro. If Fitbit were liquidated tomorrow, shareholders would be able to recover $357.88 million; Fitbit stock trades at a multiple of 3.82 times net-net working capital.

If GoPro were liquidated tomorrow, shareholders would see nothing, since net net working capital is negative for GPRO. So if you’re thinking of buying GoPro shares on this dip, I’d take a flyer on Fitbit stock’s downturn instead.

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/dont-buy-gopro-inc-gpro-stock-buy-fitbit-inc-fit-instead/.

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