GoPro (NASDAQ:GPRO) has been on a tear, both financially and with its stock performance. In the past year to Oct. 16, GoPro stock is up over 85%, gaining 68% in the past month alone.
The camera maker is benefiting from substantial increases in both its subscriber base (GoPro Plus) and sales on its website. Investors love this as it will mean higher margins over the long run.
What they love are things like GoPro’s Oct. 6 announcement that its online paid subscriber base will reach 600,000 to 700,000 by year-end. This is up significantly from 372,000 at the end of Q2, according to its Aug. 6 press release.
Changing Business Model Behind GoPro Stock
Keep in mind that the GoPro subscription costs $50 – $60 a year, depending on the selected features. It comes with high-margin services, such as storage and online discounts.
Even if it hits 700,000 subscriptions per year this year, that represents $38.5 million annually on a run-rate basis. However, the company’s sales as of Q2 were $134.2 million. So the subscription base is only 7% of total sales on a run-rate basis. However, most of the company’s sales come in Q4, so the percentage is probably more like 5%.
The company is still running net income losses. However, it is highly likely that the subscription business is extremely profitable. Its camera business has 30% gross margins. But the subscription business likely has margins at least twice that level. That is why Wall Street is so excited over the last several weeks with GoPro stock.
Big Push for Own-Site Sales
GoPro is now saying that it expects close to 100% of its camera sales to come through its GoPro.com website, rather than via in-store sales. For example, as of Q2, this channel represented 44% of sales.
The value with this channel change is that theoretically, the company can keep some of the sales margins that it had to give up to retailers. Right now the company is offering discounts of $100 on its popular cameras if buyers sign up for a yearly subscription.
So, it might be giving up some of this margin. But in the long run, if the subscriber base sticks, the company will be better off. Especially if the subscription revenue is seen as recurring revenue.
Some Skepticism on Potential Upside
Writing on Seeking Alpha on Oct. 13, Joe Albano, called the recent Covid-19 pandemic a “blessing in disguise” for GoPro’s recurring revenue. He wrote that the company’s subscription offerings is what the company needed all along.
A week earlier, Gary Alexander, recommended that investors stay long as he sees the subscription model as a “reliable replacement cycle” for its products.
TipRanks.com says that three analysts in the past three months have written reports on GoPro stock with an average price target of $5.60 per share. That represents a 16.7% decrease from the present price at $6.72.
Similarly, Marketbeat.com reports that five analysts have an average 12-month target on GoPro stock of $4.58. This represents a potential drop of 31.8% from Tuesday’s closing price.
In other words, not everyone believes in the potential upside for the stock. To say the least, this is a speculative play.
What To Do With GPRO Stock
Right now analysts are forecasting positive earnings in 2021, up from the company’s traditional losses. For example, Yahoo! Finance has a poll of five analysts that predicts 2021 EPS of 55 cents per share. That puts the GoPro stock price on a forward P/E ratio of just 12.5 times. Seeking Alpha shows a consensus of three pennies less, at 52 cents per share.
The problem is these estimates are hard to believe. For example, they most likely depend on the recent subscriber growth numbers. But there is not enough experience yet with the actual churn rates with these new additions.
Therefore, I say use some caution. I would wait to see what the actual Q3 numbers turn out to be on Nov. 5. There should also be more Street analysts commenting on GoPro stock by then as well.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
