GoPro Inc (NASDAQ:GPRO) stock has been one of the most volatile names on Wall Street since its IPO in late June 2014. After pricing at $24 per share, GPRO shares more than quadrupled, peaking close to $100 in October, before unceremoniously plunging.
Although GPRO stock boasted a remarkable fourth-quarter earnings report that sent the stock higher, the sudden departure of COO Nina Richardson and the looming, highly anticipated end of the lockup period on Feb. 17 have shares of the wearable camera-maker trading for just $45.
The question on the minds of many investors is whether the most recent declines represent a buying opportunity or whether this is an ominous warning of things to come.
And after looking at GPRO stock through the lens of one popular valuation metric, GoPro stock may indeed be a steal at current levels.
PEG Ratio Shows Value in GPRO Stock
Most investors have heard of the P/E ratio, in which a stock’s price is divided by its earnings per share to show how its price reflects its profitability. This is then compared to the P/E ratio of other stocks in its sector, industry, or the stock market as a whole — and the lower the better, since a high P/E indicates a stock is trading for a high premium to its earnings.
One big problem with the P/E ratio hails from the simple fact that investors will always be willing to pay a higher price for companies with greater growth prospects. Thankfully, PEG ratio controls for that inefficiency by dividing the P/E by the expected earnings growth of a company.
For example, GPRO stock trades for a P/E around 48. Its three-year projected EPS growth rate is 25%, according to S&P Capital IQ. Using that data, GoPro stock’s PEG ratio is 48/25, or 1.92.
While PEG ratios above 1 are sometimes considered to indicate an overvalued stock, in a market of stocks we must examine the valuation of other growth stocks to understand what’s cheap and what isn’t. And compared to the PEG of three high-profile, household-name growth stocks, GPRO stock looks cheap:
- Chipotle Mexican Grill, Inc. (NYSE:CMG): P/E ratio: 46. 3-yr. projected EPS growth rate: 22%. PEG ratio: 2.1.
- Netflix, Inc. (NASDAQ:NFLX): P/E ratio: 102. 3-yr. projected EPS growth rate: 38%. PEG ratio: 2.7.
- Under Armour Inc (NYSE:UA): P/E ratio: 78. 3-yr. projected EPS growth rate: 24%. PEG ratio: 3.25.
So, unless you vehemently disagree with the growth projections of Wall Street analysts, GPRO stock, after its recent selloff, trades at a discount to both CMG, NFLX and UA stock.
What You Should Know About the PEG Ratio
Clearly, the PEG ratio isn’t perfect, and GoPro stock in particular is tricky to value because as a recently public, $5 billion consumer technology stock carving out a niche of its own it doesn’t have any true peers. As a result, CMG, NFLX, and UA may seem like arbitrary comparisons, especially considering each of them is between 2.5x and 4.5x the size of GPRO.
However, each of those three companies are definitively high-growth stocks, with analysts calling for EPS growth upwards of 20% from each over the next three years. Stocks like LinkedIn Corp (NYSE:LNKD) and Tesla Motors Inc (NASDAQ:TSLA), while certainly growth stocks, can’t be used because…well…they don’t really have any earnings to speak of.
While the PEG ratio should be taken with a grain of salt, there’s no metric that’s been discovered to this day that accurately predicts which stocks will outperform others. If you ever find it, email it to me and I’ll buy you dinner or something.
Until then, the numbers are telling us GPRO stock is a buy after its most recent pullback.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.