GoPro Stock at $25 Is Fairly Valued – Buy Now! (GPRO)

After a 60% decline from its post-IPO high, I told InvestorPlace readers not to buy GoPro (GRPO) stock back in September, and that $35 represented fair value.

GoPro Stock at $25 Is Fairly Valued - Buy Now! (GPRO)As a result, there was limited if any upside over a span of 12 months from its then price of $33.

However, with GoPro stock price now $25, down another 23% from my last article, it looks like a good time to reassess GPRO.

How to Value GPRO

The best metrics to determine fair value in GoPro stock back in September are still the best today. The value of GPRO’s media business, which is essentially a YouTube channel, remains a very generous $500 million based on the price that other companies paid to acquire Maker Studios and Full Screen.

In regards to GPRO’s hardware business, a two times sales ratio is fair given the reported price that Apple (AAPL) paid for Beats. Like Beats, there are questions surrounding GoPro’s longevity, whether it is a fad and if it can enter new hardware categories. Therefore, two times sales takes into account these concerns.

For 2015, GoPro is expected to create revenue of $1.72 billion, significantly lower than the $1.93 billion that was expected prior to its recent quarter. Therefore, GoPro is worth approximately $4 billion right now after adding $500 million for its emerging YouTube and media channels.

Currently, GoPro stock is trading with a market cap of $3.4 billion.

Is It Time to Buy GoPro Stock?

At $25 a share, GPRO looks like a fairly good investment opportunity. This is a company that is curently expected to grow revenue 16% in 2016 to $2 billion, and if we apply the same valuation model to next year’s expected revenue, then GPRO is worth $4.5 billion over the next year. That’s upside of 32%, which is worth owning a small piece of GoPro stock.

Furthermore, there is a wildcard that could drive GoPro stock price even higher over the next 12 months: The company’s recently announced buyback program of $300 million would reduce its share count by nearly 9% at GPRO’s current price.

This move essentially adds buying pressure to GoPro stock, and by reducing the share count, GoPro stock price will have to trade higher to support the same market cap.

In other words, if GPRO were to reduce its share count from 135.8 million to 123.8 million via buybacks, then its stock price would have to reach $36.3 vs. $33.1 to support the same $4.5 billion market capitalization based on next year’s earnings performance.

Hence, the upside in GoPro stock becomes 45%, not 32%, because of GoPro’s buyback.

This upside based on a very conservative valuation formula makes GoPro stock a nice buy and hold over the next year.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities, but may initiate a long position in GPRO in the next 72 hours.

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