GoPro IPO: Should Investors Snap Up GPRO?

The deal should be hot, but the company has tough competition

GoPro, the developer of the popular HD action-sports camera, plans to issue 17.8 million shares at a range of $21-$24. Assuming the deal gets done at the mid-point, the company will sport a valuation of about $3.4 billion.

gopro ipoSo what should investors expect? Is this a deal to buy or avoid? To get a better sense, let’s take a look at the background of the GoPro IPO.

Back in 2002, while surfing in Australia, Nick Woodman wanted to take photos and videos while on his board. But with existing cameras, it was just too expensive and complicated. He saw this as a huge opportunity and wasted  little time in building GoPro cameras.

He tried pitching investors for funding, but there was little interest. The idea seemed too risky. Undaunted, Woodman sold beads and shell belts out of his VW van to raise money. The plan worked out extremely well and also provided an interesting idea for GoPro cameras: attaching a cool-looking strap.

From the start, customer demand was robust. From 2011 to 2013, revenues shot up from $234.2 million to $985.7 million, while profits went from $24.6 million to $60.6 million. Numbers like that made the GoPro IPO a no-brainer. Woodman took a page from the Apple (AAPL) playbook, making sure GoPro cameras were top-quality, premium-priced products. This meant making the videos high-quality, creating a sleek design and using cutting-edge technology.

GoPro has also soared on a standout brand, and social media was critical to that success. Woodman invested in software to make it easy to edit and share videos, leading to more than 4.3 million downloads of GoPro Studio. The company has more the 7.2 million Likes on Facebook (FB), 2 million followers on Instagram and almost a million followers on Twitter (TWTR). But the most important channel for GoPro cameras has been Google’s (GOOG) YouTube. For the first quarter of 2014, customers averaged about 6,000 daily uploads, totaling more than 1 billion views.

Keep in mind that GoPro hasn’t begun to monetize any of this social media.But according to the S-1, this will change soon. No doubt, social media could represent a nice revenue opportunity and a boost to the GoPro IPO.

Yet as with any new company, there are still some nagging issues. During Q1, revenues dropped by 7.6% to $235.7 million and net income plunged by more than half to $11 million.

True, this may be a temporary blip. But it could also mean that the market for GoPro cameras is limited. How many people really want this type of technology? If consumers start to feel that an iPhone or Android device is good enough, that could be devastating for the company.

Besides, GoPro cameras are finally getting serious competition. Canon, Nikon, Samsung, Sony (SNE) and Garmin (GRMN) are just a few of the competitors entering the space. And don’t count out the aforementioned Apple and Google.

Now the GoPro IPO is likely to be a hot deal as there should be strong buying from fans. But GoPro will also be a way to get exposure to the emerging market in wearables. However, as seen with many high-profile IPOs, the stock will likely be volatile. So it is probably better to wait some time until making a purchase in the aftermarket.

The GoPro IPO is expected to hit the market next week on the NASDAQ, with the ticker of GPRO. The lead underwriters include J.P. Morgan (JPM), Citi (C) and Barclays (BCS).

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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