Monday was a wild day for GoPro Inc (NASDAQ:GPRO) stock. First, the action camera maker issued dismal fourth-quarter guidance, announced a complete departure from what was supposed to be its high-growth drone business and announced intentions to do yet another round of big job cuts. The swirl of bad news sent GoPro stock down. Big. By more than 30% to $5 at one point.
Then the rebound happened.
Chief Executive Officer Nick Woodman said in an interview with CNBC that he’d consider selling the company. CNBC did some digging, and found that GoPro has hired investment bank J.P. Morgan Chase to help it seek a potential sale. The details surrounding the GoPro-JPM partnership are unclear (such as when GoPro contracted JPM), but the rumors were enough to get investors excited about a potential buyout.
GoPro stock jumped. From $5 to over $7 in a matter of hours.
But then bulls hit the pause button. Questions started to swirl around the legitimacy of an acquisition. Is GoPro actually for sale? Who would buy it? And what’s the standalone value of GoPro if it doesn’t get bought out?
The rally in GoPro stock subsequently faded. GoPro dropped back down and closed Monday around $6.50, and it is dropping in early Tuesday trade.
So what’s the move here? Buy GoPro stock on the dip and hope for a buyout? Or ditch the stock?
Right now, I don’t think there is any reason to own the name. But if it dips back to around $5, I think that is a buying opportunity.
GoPro’s Standalone Value
I have long said that GoPro’s standalone value is around $9-per-share. But that was before Monday’s big announcement.
GoPro is exiting what was supposed to be its high-growth drone business. They are going to sell the remaining Karma in inventory, and then poof, no more drones. GoPro cited big competition, regulatory concerns and lack of profitability as reasons they pulled out of the drone game. Those are legitimate reasons, but nonetheless, growth going forward will be more subdued.
GoPro is also lowering the average selling prices across the board on all of its products. This holiday season, GoPro had trouble selling its cameras at their initial price points, indicative of a competitive marketplace saturated with lower-price players. So GoPro slashed its camera prices by about $100 on average, which led to a volume surge at the expense of margins.
Going forward then, this is a slow growth company with low margins.
With the $340 million Q4 guide, it looks like revenues for the full year will come in around $1.2 billion. I initially predicted that stable camera sales at higher average selling prices plus incremental drone revenue would drive 10% revenue growth per year over the next five years.
Now, drone revenue is gone and cameras will be sold at lower average selling prices. But the price reductions should drive volume growth. Consequently, I think GoPro can grow revenues by roughly 5% per year from this year’s depressed $1.2 billion base.
Operating margins won’t get anywhere close to their 10% peak now that the company is cutting prices across its product portfolio. Its much more likely they bounce to 5%, as continued opex reduction drives incremental profitability.
A 5% operating margin with 5% revenue growth over the next five years puts revenues at just over $1.5 billion and operating profits at $77 million in five years. Throw a 21% tax rate, and that translates to about $61 million in net profits, or about 45-cents-per-share (assuming 136 million diluted shares). Throw a long-term average 16-times multiple on that, and you get to a five-year forward price target of about $7.20.
Discount that back by 10% per year, and you arrive at a standalone value of around $4.50.
What If GoPro Gets Acquired?
But GoPro could get acquired.
It is an attractive asset in that the company has a strong brand, is a leader in a niche market, has a decent balance sheet and it is trading well below 1-times sales. Tech giants (the most likely suitors) are also expected to repatriate a ton of cash over the next several quarters, and many investors and analysts think that cash will go towards M&A.
Consequently, it isn’t unlikely that GoPro gets acquired. The Apple Inc. (NASDAQ:AAPL) rumors have been floating around forever, but with a ton of cash being repatriated soon and GoPro stock at all-time lows, the acquisition now makes more sense than ever. Competitor Garmin Ltd. (NASDAQ:GRMN) is also a potential buyer, as are drone companies like DJI.
But the chances of a takeover happening are still less than 50%. Call it 40%. In this sense, I think there is a 40% chance GoPro gets acquired at its 200-day exponential moving average around $9.
Bottom Line on GoPro Stock
Lets do some math.
There is a 60% chance GoPro stock heads towards its standalone fair value of $4.50. There is a 40% chance GoPro stock gets acquired at $9. That combination leads to an expected fair value of GoPro stock right around $6.30.
That is essentially where GoPro stock trades today.
The takeaway: don’t buy now. Wait for more weakness.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.