About a month ago, I said that the right price to buy GoPro Inc (NASDAQ:GPRO) stock was below $8. Since then, GPRO stock has tripped from $9 to that all important $8 level. Is it time to buy? Maybe. But only if you can stomach near-term choppiness.
My research suggests that GoPro is not having a good holiday season. Consequently, I don’t think fourth quarter numbers will be that good. Considering more than a third of this year’s revenues are expected to be generated in the fourth quarter, bad Q4 numbers could send the stock to new lows.
As such, I am bearish on GPRO stock in the near-term. Longer-term, though, I think the price is right to start taking bites. Here’s why.
GoPro’s Bad Holiday 2017
It doesn’t look like GoPro cameras and drones are selling that well this holiday season. While GoPro cameras are the best-selling action camcorders at Best Buy Co Inc (NYSE:BBY), it looks like this whole action camera space is shrinking.
Just look at search interest trends for GoPro’s cameras over time. Each new product launches to less fanfare than prior products. The Hero4 had higher search interest than the Hero5, which had higher search interest than the Hero6. This is a bearish trend that only accelerated this year, implying GoPro action cameras aren’t a popular gift item this year.
An interesting side note is that best-seller lists from Amazon.com, Inc. (NASDAQ:AMZN) show that another type of camera was the hot gift this year. Fujifilm’s Instax Mini 9 Instant Camera seems to be the camera of choice this holiday season.
While the audience overlap between Instant Camera buyers and GoPro camera buyers isn’t huge, it is enough to account for some weakness in GoPro holiday sales.
On the drone side, the overall consumer drone market is growing, but GoPro is one of the smaller players. Done sales this holiday season are expected to increase more than 30% year-over-year, but according to Best Buy best-selling lists, GoPro’s Karma drone is less popular than a handful of other drones.
Overall, then, it looks like GoPro drone sales increased healthily this holiday season while GoPro camera sales fell off. That isn’t a great combo, considering there were pretty big expectations for new GoPro cameras. Although it already has come down quite a bit over the past several months, GPRO stock could fall even more if Q4 numbers miss the mark.
GPRO Stock Has Long-Term Upside
Despite this near-term pain, I think GPRO stock is undervalued in a long-term window. Yes, GPRO is a one-trick pony. But it’s a pretty talented one-trick pony. The company has a tiny addressable market that isn’t really growing all that much, but GPRO dominates that niche market.
As far as action cameras are concerned, GPRO still doesn’t have much competition. Just look at the best-selling action camera list at Best Buy. Consequently, while revenues won’t explode from here, they should grow slightly with increasing drone sales.
Also, GPRO is unprofitable. Now. But it was running at 10% operating margins not too long ago. Earnings are inflecting upward and heading towards full-year positive territory for the first time in a while.
Given these dynamics, I think it’s likely GPRO does grow revenues 10% per year over the next five years and gets operating margins to around 10% (where they were in 2012 and 2013). That implies $1.9 billion in revenues and $190 million in operating profits in five years.
Slap a 34% tax rate on that and divide by about 136 million diluted shares, and you get to about $0.90 in earnings per share in five years. Throw a long-term average 16 times price-to-earnings multiple on that $0.90 earnings base. You get a $14.50 stock in five years. Discount that back by 10% per year. You get to a present value of $9.
Bottom Line on GPRO Stock
I buy GPRO stock at a discount to $9. Below $8 seems like a big enough cushion for me. I am worried, though, about near-term weakness in GPRO due to poor holiday sales. Consequently, I’m only taking small bites here. Consider me cautiously optimistic at these levels.
As of this writing, Luke Lango was long GPRO, BBY, and AMZN.