Do Recent Buyout Rumors Make GoPro Inc Stock a Buy?

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GPRO stock - Do Recent Buyout Rumors Make GoPro Inc Stock a Buy?

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Shares of much maligned action camera maker GoPro Inc (NYSE:GPRO) are heading higher following refreshed M&A rumors. The Information recently reported that Chinese electronics company Xiaomi is considering buying GoPro.

The rumored takeover price? $1 billion, which would equate to about $8-per-share for GPRO stock. GPRO stock was trading under $5, so the pop on $8-per-share buyout rumors seems reasonable.

But is there more upside left? Unlikely.

These M&A rumors seem to be just that — rumors. Meanwhile, I peg GPRO stock’s standalone fair value at right around $4. That means that by my calculations, buyout expectations are already partially priced into the stock.

All in all, unless you think there is a greater than 25% chance Xiaomi swoops in and buys GoPro, I wouldn’t chase the GPRO stock rally here.

GoPro Stock Is Worth $4 By Itself

GoPro has struggled tremendously as of late. The company continues to sell less and less cameras every year as smartphone cameras have become more multi-purpose in nature. Those cameras that company still sells are at reduced price points. Meanwhile, the whole drone tailwind that was supposed to save GPRO stock has suddenly and dramatically disappeared.

As of a few months ago, GoPro is officially exiting the drone business.

The net result is falling revenues, crashing gross margins, still huge losses, and a deteriorating outlook for those things to change. But declines in camera shipments are moderating (-28% in fiscal 2016 and -10% in fiscal 2017). This moderation should continue because GoPro does market to a loyal core demographic which need and have come to love the added perks of a GoPro camera over a smartphone camera. These are the active types — the surfers, mountain bikers, and rock climbers.

This market isn’t big. That is why unit shipments have been falling from their peak. But the market is very real. And that is why unit shipment losses will continue to moderate.

Meanwhile, average selling prices should come up slightly from the current reduced base. That will help revenues grow slightly and, more importantly, allow gross margins to rebound some. Operating expenses are coming out of the system quickly, and management is targeting for operating expenses to be less than $400 million in 2018.

All together, stable camera unit sales plus slight increases in average selling price should lead to stable revenue growth in the 1-2% range. Those increases in average selling price should allow gross margins to creep back towards the upper 30’s range seen in 2016 (from lower 30’s last year), but not all the way back because pricing will still remain challenged. Meanwhile, operating expenses should be able to stay under $400 million into the foreseeable future as management continues to focus on cost cuts.

A 1-2% revenue growth rate over the next 5 years, gross margins of 35% in year 5, and operating expenses of $380 million leads to revenues of $1.27 billion and operating profits of $64.8 million in 5 years. Taking out 25% for taxes and dividing by 135 million shares out, that equates to roughly $0.36 in earnings per share. A market-average 16-times forward multiple on that implies a four-year forward price target of roughly $5.70. Discounting that back by 10% per year, you arrive at a present value of roughly $4.

Bottom Line on GPRO Stock

Without the M&A catalyst, GoPro stock is worth about $4. But there is a possibility that GoPro gets taken out at $8-per-share.

At best, I think there is a 25% chance of an $8 takeover, implying a 75% chance GPRO stock falls back to its $4 standalone value. That combination leads to a fair value of roughly $5.

As such, unless you think there is a greater than 25% chance GoPro gets bought out at $8-per-share, I wouldn’t chase this rally in GPRO stock.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/recent-buyout-rumors-make-gopro-inc-stock-buy/.

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