I can understand why GoPro Inc (NASDAQ:GPRO) might look tempting at the moment. The GPRO stock price again has dipped under $8, falling back to levels last seen in the first half of the year. Yet, the company is coming off a pair of strong earnings reports that showed significant improvement in margins and profitability.
Those reports helped… but I’m not sure they helped quite enough. I’ve long been bearish on GPRO stock, predicting in March it would hit an all-time low this year (it did) and, two months later, adding CEO Nicholas Woodman to a list of CEOs who should move on. But even I was impressed by the second-quarter earnings beat. And Q3 was strong as well, even though investors were disappointed by Q4 guidance.
But the primary concern I had about GPRO even coming out of Q2 hasn’t changed. The GPRO stock price simply isn’t all that cheap yet. It’s still pricing in a reasonable amount of growth. Yet, its solid numbers for 2017 aren’t a sign of growth. Rather, GoPro simply is benefiting from comparisons against an utterly disastrous 2016.
This simply isn’t a company that has proven it can generate consistent growth. And until it does, it seems unwise to bet on that growth without a much better price that incorporates some of the risks as well.
2017 Is Better, but Still Not Great
At the midpoint of 2017, guidance detailed in GoPro’s Q3 earnings report suggest 2017 should be a very good year:
- Revenue +11%
- Adjusted EBITDA of $81 million (my estimate based on Q4 guidance) versus negative $193 million in 2016
- Non-GAAP EPS +$0.03 versus -$1.44 in 2016
Clearly, GoPro has taken some steps in the right direction. Revenue has grown. Costs have come down dramatically, with non-GAAP operating expenses guided to fall over 30%, from $709 million last year to under $490 million this year.
But if you compare GoPro’s 2017 to 2014, the growth profile looks much different over three years than it does over one:
- Revenue -5.7%
- Adjusted EBITDA -72%
- Non-GAAP EPS $0.03 versus $1.32 in 2014, a -97.8% decline
EBITDA margins have compressed some 1,400 basis points over that period. Operating expenses still have risen, despite the drop in sales. Gross margin has come down as GoPro hasn’t been able to maintain pricing, as it has tried to expand its base.
This simply isn’t a growing company. Looking forward, growth isn’t guaranteed, either. Of the ~$275 million improvement in expected adjusted EBITDA this year, at least $220 million is coming from cuts in operating expenses. Those cuts are not repeatable in 2018. The reason tepid Q4 guidance has sent the GPRO stock price tumbling is that investors are worried that — like last year — the holiday season will lead to price cuts and inventory write-downs.
In short, while 2017 was an improvement, GoPro still has a lot of work left to do.
Is GoPro a Viable Business?
To be fair, GoPro still has a few drivers left. The 360-degree Fusion camera looks intriguing and launched in November. HERO6 should contribute through next year. The Karma drone has been a disappointment, with a recall last year, and COO CJ Prober said on the Q3 conference call that distribution would be limited going forward. But GoPro will release a second — and, hopefully, improved — product for that fast-growing market down the line.
Still, the question remains as to just how big the addressable market for action cameras truly is. GoPro has room to grow internationally, but the US market has some degree of saturation.
As for other drivers, they’re not guaranteed. 360Fly, owned in part by VOXX International Corp (NASDAQ:VOXX), has had a 360-degree camera on the market for several years now, with close to zero success. Garmin Ltd. (NASDAQ:GRMN) has beaten GoPro to market with its Virb 360.
In drones, Chinese maker DJI is the clear leader, and military supplier AeroVironment, Inc. (NASDAQ:AVAV) is moving into the commercial space, with consumer entry possible in the future.
None of this is to say that GoPro can’t win or can’t grow. But it will be difficult — and even a better 2017 isn’t enough to earn back all the confidence the company lost last year. Being a single-product hardware company is a tough road to hoe — just ask Fitbit Inc (NYSE:FIT). And the problem with the GPRO stock price is that it is pricing in some level of consistent growth going forward.
The GPRO Stock Price
Obviously, relative to its 2017 price-to-earnings ratio, GPRO stock looks very expensive, at ~250 times the midpoint of full-year guidance. But that’s a function of narrow net margins. Still, on an EV/EBITDA basis, GPRO trades at nearly a 15 multiple. And more than half of that EBITDA is coming from stock-based compensation, which dilutes existing GoPro shareholders.
Even next year’s consensus EPS of 43 cents — which assumes continued improvement into 2018 — still values GPRO at ~18x EPS. And while that sounds cheap, it’s still a number that requires GoPro to grow profits, if modestly, well beyond next year.
That’s just not a bet I’m willing to take. Competition is coming. The market is limited. A takeover of GoPro would make some sense — companies like Sony Corp (ADR) (NYSE:SNE), Canon Inc (ADR) (NYSE:CAJ), and even Snap Inc (NYSE:SNAP) have been floated as potential acquirers — but that would require Woodman, the controlling shareholder, to sell the company he founded at a huge discount to past share prices.
It’s still a tough path to upside for GPRO stock and, truthfully, it’s still an unlikely path. Admittedly, it’s more likely than I thought it was nine months ago, but it’s just not likely enough to take a flyer on GPRO until the stock gets closer to $6.
As of this writing, Vince Martin has no positions in any securities mentioned.
