Bf Gf Portfolio Secret Stock revealed : GoPro (GPRO)

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“Life is either a daring adventure, or nothing at all.”

GoPro.  Be a Hero.

 

This time, I really must be a hero, first time buying into a stock at a P/E ratio of 41.  But before you all go ranting and asking me if I am crazy, give me a chance to explain myself!

 

I did not even realised that GoPro (GPRO) had IPOed last year in June 2014.  Back then, I was still patting myself on the back over my stock picks on SGX, and had not ventured out into the US market until late 2014.  Even if I did know that GPRO had IPOed, I was not interested.  I am sure all you seasoned investors know the risks of investing in IPOs right?  For those that don’t here are some quick explanations:

– Not enough data provided by the company.  We can’t really tell how good they are performing financially.

– IPOs tend to get a bit over hyped.  The stock market usually pushes the price to exorbitant levels.

But the business of GPRO was very interesting to me.  They sell hardy, action cameras.  I found myself thinking about it a lot after my friend wore it on his chest at a wedding.  Hilarious moments were captured during the gate crashing ceremony.  All made possible from the unique angle of GoPro.  GoPro was also brought up again when I had a discussion with fellow investors about businesses with ‘cult-like’ following.  GoPro also appeared a few more times on Facebook statuses of another investor friend, talking about the mission of the company.

Other than those few instances, I did not bother to go and dig up facts about GoPro.  Until 2015…

 

 

Falling Prices, Improving Fundamentals

GoPro had hit a market high of $93.85 in Oct 2014 before plummeting all the way down to $38.10, on 11 March 2015, when I bought its shares.  It was about a 60% drop from its peak price.  When I bought the stock, it was trading at a P/E of 41.  Obviously that is a high valuation.  Let’s start by looking at the financials to justify the stock purchase:

Income Statement for GoPro

Income report from Morningstar.

 

Look at that sick revenue growth.  CAGR from 2011-2014 is at 81.28%.  Gross Margins have more or less been maintained in the range of 36% – 53%.  Earnings growth has been about 70%.  For the sake of newbie investors, earnings growth of 15-20% is considered pretty good, 30% and above is considered high, 70% could even be criticised as ‘unsustainably-high’ and may slow down in future years.

If I were to give an estimate of a lower earnings growth for next year, let’s say 50% EPS growth, this would bring my future PE (FY2015) down to 27.6

If I were to say that for the FY2016, their EPS growth slows down to 30%, this would further bring the future PE down to 21.3.  And so on, and so for.

But hey, these are just fancy projections. Any Tom, Dick or Harry can make them.  However, just by looking at the next year FY2015, I think an EPS growth of 50% might be very achievable, given the momentum they are on right now.  So when I buy at a high PE of 41, I am betting on the earnings growth to continue on into the future.  When you look back 4-5 years later, you might be thinking, “Damn, that was cheap!”

 

But before we go crazy let’s look at the cashflow and balance sheet to make sure that all is well:

Balance Sheet for GoPro Inc

Balance sheet taken from Morningstar.

Quick glance through at the balance sheet shows that there is no debt at all currently.  The past years have also showed a trend in increasing cash and total assets, whereas total liabilities showed a decrease from the previous year. While the total assets are increasing, the total liabilities do not seem so show any co-relation at the moment.  Good sign!

 

Cash Flow for GoPro

Cashflow taken from Morningstar

 

Quick check on the cashflow shows that there is substantial FCF. CAPEX is also increasing at a moderate pace.  Nothing suspicious or out of the ordinary so far.  Another good sign!

 

So why is the price falling while the fundamentals are obviously improving?

GPRO IPOed at a price of $24 and due to hype, the price got pushed to $93.  By the time the market realised it was overvalued, shares were being shorted, pushing it all the way down to $38. Also, the Q1, Q2, Q3 results for GoPro  were far from outstanding.  Q4 contributed to the bulk of 2014 earnings.  I am not sure why there is such a drastic change of underperforming Q1,Q2,Q3 and then, BAM – an astounding Q4!  Whether this process will be repeated, I shall have to wait and see.  This is a risk and a grey area which I have to take note.

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GPRO is a Cult!

I love businesses with a branding so strong that they can build a cult of loyal followers.  (Just take a look at Apple.)  With GoPro, a cult clearly exists despite the existence of many competitors who offer cheaper and much better quality cameras.  I take it that GoPro probably has a first mover advantage.  This company created an industry where no industry existed for goodness sakes!

Data for GPRO being a cult includes:

-Highest number of subscribers for the year 2014 in the whole of Youtube. ~ 2.2 million subscribed to the GoPro channel!

– The number of subscribers increased by 72% in one year!

– 640 million views on the GoPro channel

– 4.5 million subscribers on Instagram, Ranked 84th, average daily followers~ 7k.

– Instagram subscribers increased from 2M in May 2014 to 4.5M in March 2015.  That’s a 125% in slightly less than a year!

If these stats don’t show cult-like behavior, just go check out the GoPro videos on Youtube.  It will blow your mind.  Guaranteed.

 

Management

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GoPro Reviews   Glassdoor

 

A check on Glassdoor shows another grey area, only 26 reviews given for the company.  This is insufficient data to get a sense of the company’s culture or management effectiveness.

Nicholas Woodman, the founder and CEO, thought of creating GoPro when he was surfing in Australia and Bali.  He just wanted an camera which he could strap to his hand and take photos while surfing.  That idea has evolved a lot since then, and GoPro now has Wifi and remote control function and retails for $200-$400.

Watching videos of Nicholas Woodman gives me the impression that he is a down-to-earth CEO as he is always wearing t-shirt and jeans.  Seems like a great fellow,

But then again – this is still a grey area that we may need to learn more about in the future.  Just because the CEO wears t-shirts and surfs doesn’t mean the culture of the company is great.  Speaking of which, it seems like every start-up is going for that casual look.

 

The Future of GoPro

Studying the history and financials of the companies doesn’t make us investors, it makes us historians.  We have to try to look into the future.  All past records of the company just give us an idea of what the company is like, just like how your boss reviews your resume before hiring you.

Here’s taken from the GoPro website:

Our strategy
We intend to expand our existing capture business and broaden our portfolio with content management, editing and sharing solutions to provide increased value to our customers, introduce new revenue streams and further differentiate us from competitors. Key components of our strategy include the following:

 

Continue to introduce innovative capture devices
We relentlessly pursue our goal of developing the world’s most versatile capture devices and enabling self-capture during any activity. In September 2014 we introduced our line of HERO4 capture devices and our HERO entry-level capture device. To stay at the forefront of our industry, we are focused on continued product innovation and leadership. For example, we develop our own custom lenses, custom sensors and digital signal processing technologies. Other areas of innovation include audio, battery and accessory design. We may also leverage our brand strength and product expertise to opportunistically enter new device categories.

 

Develop seamless content management, editing and sharing solutions
We believe it is important to simplify the organizing, editing and sharing of engaging content and, to that end, we are developing an integrated content management platform. We may consider additional acquisitions of complementary technologies or businesses in the future. In addition, we may seek to leverage our content management platform as a new revenue stream.

 

Scale as a media brand
GoPro programming is a potent marketing tool which we believe, on its own, has significant value as a growing media asset. We are investing to scale GoPro as a media entity and develop new revenue opportunities by increasing production of GoPro originally produced content while simultaneously increasing the aggregation and redistribution of our customers’ “best of” UGC. Additionally, we are investing to develop, distribute and promote GoPro programming on additional partner platforms such as Virgin America and Xbox Live.

 

By looking at the last 2 points, it becomes obvious why GoPro is ahead of its competitors.  It’s content management, editing and sharing solutions are pretty amazing.  Users can simply, click and drag their video onto a template and it will be edited instantly.  The user just needs to make some tweaks here and there.  As for trying to scale as a media brand, GoPro is still in the early stages and not much revenue is being derived from there yet.  But with the number of subscribers they have on Youtube and Instagram, I feel that it is highly possible.

 

Risks and Grey Areas

 

Every investment comes with risks.  The most obvious one being:

– Competitors coming up with better cameras at lower price (E.g Xiaomi)

Grey Areas include:

– Have to monitor their quarterly financial report.  Earnings seemed to be all lumped into the last quarter, according to the previous year.

– Lack of knowledge about management and company culture.

If any of you reading this have information to provide, do include it in the comments section!

 

Conclusion

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GoPro seems to be on a fast-growth momentum for the time-being.  It has sound finances. It has an undeniable, strong, cult-like status.  It is an innovator or even and an industry-creator. It’s content managment solutions provides an additional avenue for monetisation.  It has more or less the foundations in place to scale into a media brand.

It makes really kick ass videos.

Seriously.  The videos are so kick-ass they make me feel like a dull person with no adventure in life.  *Sob sob*

And that’s something intangible that you can’t quantify… but have a gut feeling that it will lead to more great things in the future.

OK Enough boring analysis!  Enjoy this promo GoPro video !

 

 

 

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10 Comments

  1. Lazy Singaporean

    It has to potential to go even lower, right?

    Reply
    1. The Bf (Post author)

      Yes it has potential to go lower…and higher! Hahaha!

      From my experience, high P/E stocks are extremely volatile as they need to meet market expectations for growth. So when they miss earnings forecast, you might see a steep drop again.

      But my time frame is 10 years. I will just ride this rollercoaster out.

      Reply
      1. Lazy Singaporean

        I see, thank you!

        Reply
  2. Kelv

    Missing earnings forecast might be possible as everyone as noticed how massive the profits are. Especially when a company that copies and sells cheaply are entering the market, the 1st few forecasts might not be met. Then again, if you got it at a an affordable price, keep with it. They would ride through and go up again soon. Just wait for their next product release.

    Reply
    1. The Bf (Post author)

      Honestly, earnings forecast just provides a media circus for financial news reports.

      All we should care about is improving earnings and not whether earnings meets analysts expectations or not.

      Unless you are trading short term then its a different story…probably…

      Reply
    2. The Bf (Post author)

      Oh also to add on. A friend commented :

      Forecasts usually miss earnings.

      Not earnings miss forecasts.

      LOL!

      Reply
  3. ANON

    Maybe you should try looking into revenue drivers and projecting it rather than looking so flatly on guessing the growth of EPS and seeing its next year’s P/E. I highly doubt that it will be able to maintain a high revenue growth in the coming future. I’m sure you are familiar with the fact that past performance is not an indication of future results. Try projecting revenue growth based on metrics such as penetration rate and then getting future cash flow to get a fair valuation.

    Also, I think you have missed out a huge point on the fact that Apple has a patent that may bring down GoPro. See -> http://www.bloomberg.com/news/2015-01-13/here-s-the-patent-apple-could-use-to-go-after-gopro.html

    Reply
    1. The Bf (Post author)

      Good points Anon on projecting penetration rate and revenue drivers. I should be more detailed and specific for my next analysis. Even then, it’s still a projection and an estimate based on past results. How would you determine penetration rate? Number of teenagers? Number of surfers? Number of teenagers engaged in extreme sports?

      It seems like Apple has developments that can bring down go pro, electric cars companies, cashless payments, wearables , etc, etc.

      I don’t know what will happen in the future but Apple is definitely a force to be reckoned with. I am not betting the farm on GoPro though, a portfolio must be somewhat diversified.

      Some people hold Apple in their portfolio, so that they can benefit from whatever Apple tries to disrupt. But from my point of view, if I were to be so scared about whatever Apple is trying to do, I might as well just dump everything into Apple.

      Reply
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