The stock is up more than 60% at the time of writing but I think we are just at the beginning of this growth momentum. I am investing in GPRO by opening another medium-sized position at $63.20, 25.7.15 . GPRO is currently valued at the PE of 54 but I think the valuation is fair, given the rapid pace this company is developing. I have written some updates in this post. And after spending a few hours researching deeper into this company and listening to its latest webcast, I have decided to put in another medium-sized bet into this company. So on top of the current capital gains, this company takes up the largest allocation in my portfolio now.
Why valuation of PE 54 is fair
GPRO earnings are growing at a torrid pace. When I first bought it at a price of $38.10, it’s PE was at 41. (You can read about that post here.)
Now, based on the price of that first position, the current PE as compared to that price is now 34, which is becoming cheaper much faster than I expected. Assuming an earnings growth rate of 30-50% for the next year, this purchase may get even cheaper.
By investing more money into GPRO at the current price, the PE ratio of this 2nd position is at 54. This too, I think is fair and I think the earnings can be maintained for the next 2-3 years.
Why Earnings Growth Momentum Can be Sustained for the next 2-3 years
In December 2014, GoPro released their latest Hero 4 camera, propelling the revenue to increase 50% Q-Q and a diluted EPS increase of 37.5% Q-on-Q. Just when I thought they were going to drive the sales of this new product, they went ahead and released 2 more new iterations: Hero 4 Session and Hero 4+ LCD. They also released more accessories. EBITDA increased 193% y-o-y, EPS increased Q-on-Q from 0.08 to 0.35.
And, we are not even in the holiday season … yet.
The holiday season in Q4 tends to see higher sales across most consumer product companies. GPRO was so confident in their new products that they decided to go ahead and release it in June 2015, not caring about the season. I think these latest series of Hero 4 cameras alone should be able to sustain earnings momentum till 2016.
Their best selling cameras are currently Hero Black and Hero Silver, priced at $399.
Update on China
Despite its copy cat competitors, GPRO is doing well in China. In the webcast, the GPRO management talks about understanding the differences in the Chinese market, consumer preferences and shopping behavior. It seems they have executed well here as China has become one of the top 10 revenue generating countries for the company.
– 31% growth in stores in China
– A simplified Chinese version of the camera and a Chinese GoPro app will be launched later in the 3rd Quarter
The management refuses to give statistics about growth in store sales worldwide but said that they were no where near “saturation” point.
Industry Tailwinds that will benefit GoPro ( as garnered from their latest earnings webcast.)
1. Entertainment Trends
– Worldwide demand for user-generated content
– Increasing relevance of digital communication
– This acts as a marketing and promotional engine for GPRO (the users are drawing more leads to view content, who in turn become buyers.)
2. Social Media
The growth of Facebook, Instagram and Youtube will benefit GPRO as it allows users to spread more of their content to others. Viewership drives sales conversions.
– Youtube subscribers up 40% y-o-y to 3.1million in Q2
– GPRO ranked 4th most engaging brand on Instagram with 5.8million followers, up 140% y-o-y
– FB page likes is up 16% y-o-y, 8.8M fans worldwide, 40M views.
– 45,000 mentions a day in hashtags
3. Virtual-Reality (VR content)
2 new products
– GPRO is working on a 6-camera spherical array for VR with software that can be used for Occulus, Google Cardboard and Microsoft’s HoloLens.
– GPRO has teamed up with Google to create a VR platform called Jump, using a 16-camera array to capture 360-degree footage. The technology will be used on Youtube on July 2015 ( this month!) by YouTube’s top video makers.
I just want to highlight that Google is a great partner, Youtube is an amazing platform, and the 3D videos are already going viral. The age of VR might come sooner than we think.
4. Flying Drones / Quadcopter
GoPro has revealed that they will release a quadcopter in 1H2016. The picture shown above is not GoPro’s quadcopter. In fact, there are a few quadcopters out there that GoPro cameras can be mounted on. However, I feel the strength of GoPro’s branding will be such that consumers will still buy from GoPro.
I have a feeling that quadcopters won’t be so easy to implement though… Air traffic accidents? Restrictions? Pricing?
GPRO has a department for entertainment
- Inspire ppl with great content
- User content and in-house generated content
- Curated content to define brand
– GoPro studio download 11 Million times
– GPRO app downloaded 80 million times
-Currently testing new mobile app to trim and share videos and photos – launching end of summer
– Testing Cloud management system
Shows that GPRO is keeping up with the mobile and cloud trend as well.
GPRO Licensing Platform
I am really excited about this. They will use this platform to sell premium video content to advertisers/marketeers. They are currently still testing it and only a select few will get to try out the platform first. An analyst asked how much this will add to their earnings in 2016, and the management replied that it won’t be very significant. I think there is a great market for this content as I have explained in my previous post.
- GoPro garnered enough interest/requests from advertisers to go in this direction
- Currently 600 pcs of content targeted at professionals
- Right now they are gauging the response
- Not providing other data
- Not expecting it to be a large contributor in 2016.
Final Words from the GoPro management in the webcast:
“We run fast and we run hard.”
– Currently at 1,300 employees
– Attracting more talent now that they are listed
– Pace of innovation is increasing
– Competitors are finding harder to keep up with us
– Founder risks. GPRO is very much envisioned and spearheaded by Nick Woodman. I pray he remains in good health to continue taking the company forward. The company seems too young to have a management succession plan.
– Bad publicity. There are people who wear GPRO cameras and die in dangerous stunts. These may pose as media challenges and the brand may suffer. Same applies for drones… will they cause air traffic accidents or be a nuisance?
Long-Term and Why GPRO is not a fad
The greatest criticism against GPRO is that it is a fad. I have reasons to think that this won’t be a fad. But first, we must remember what’s the function of a GPRO camera: It allows the user to capture videos in high-intensity/highly-physical activities from a versatility of angles.
Thus, GPRO solves the problem and meets the user’s desire to record himself doing an activity.
Isn’t this similar to our Canon DSLR or our smartphone cameras?
When those cameras came out, did people say it was a fad?
I think there is an insatiable urge for us to record down important moments in our lives. We will want to record our child’s first steps, take photos of our food, take selfies, take pictures of scenery… and GoPro cameras just offered the solution to record yourself doing physical activities from all sorts of angles. I don’t think people will ever say things like, “Take photos of our baby? Nah… that’s so 2015….”
Will the brand be a fad?
Maybe, maybe not. There are many competitors out there selling cameras with better specs, yet… we don’t see Youtube Channels or Instagram channels dedicated to them. The competitors also do not have any accompanying software to use with their cameras. Also, while GPRO is laser focused on wearable cameras, their competitors like Xiaomi have their hands in many pies. I think GoPro is way ahead of their competitors in terms of marketing and branding. By the way, investing in any company means that you have to be comfortable of competitors!
The video above is an interview with Nick Woodman, the founder of GPRO. I like how he is so intense when he talks. Look out for the things he says at the end of the interview. He admits that despite all the success GPRO has so far, he still wakes up scared every day. The fear is a driving factor for him and his company to push and work harder as he admits that him and his team are not that smart. A humble and realistic guy with big ambitions.
So that’s it. My money is behind Nick Woodman.
What are your thoughts on this company?