Bull Vs Bear: GoPro Inc (GPRO)


GoPro Inc (NASDAQ:GPRO) stock has been trying to come back to limelight after its deal with Microsoft Corporation (NASDAQ:MSFT). Its results were below the expected levels yet again which led the stock to take another nosedive. In the last one-year period, the stock price has eroded rapidly. Both the management, as well as, the analysts have been responsible for driving the stock down either wittingly or unwittingly. Right after the IPO, the stock was enjoyed a very high valuation until the company’s disclosure of third quarter earnings in 2015 that missed. On top of that, insiders were selling at will to capitalize on the high prevailing price then. That does not mean that the company doesn’t have favorable factors. It has a strong brand, generates solid cash, and no debt at all. Therefore, let’s look at both the bull case versus the bear case to take a fresh look at the stock.

Bull Case

Financial Cushion

For any company debt and cash positions are vital. GoPro Inc (NASDAQ:GPRO) seems to be sitting pretty well on these two factors. For instance, the wearable camera device maker does not have any debt, and that makes it an interesting stock to watch. However, the company is sitting on cash, marketable securities, and cash equivalents of $474.1 million at the end of the fourth quarter, which was 12% higher than the preceding year period. Last year, the company also generated cash flow from operations of $157.6 million. That suggests that there were no issues in respect of the financial sides, at least, in the near-term. Therefore, there is enough cushions from the financial side and that it would not be any problem, at least, in the current year.

The second factor that goes in favor of GoPro Inc (NASDAQ:GPRO) was the strong brand image. It was because of this reason that the company could achieve 27% YOY growth in shipment to 6.6 million capture devices in 2015. Though the unit shipment witnessed 16.1% YOY drop in the fourth quarter, it witnessed 25.7% sequential growth from the third quarter level. The company pointed out that NPD’s analysis indicated that its digital camera or camcorder unit share witnessed 1.8 percentage points YOY growth in the fourth quarter to 21.3%. That was an indication that its powerful brand is still attractive to the users despite YOY loss of unit shipment. Also, if the data is to be believed, there was an overall weakness and GoPro Inc (NASDAQ:GPRO) gaining of share suggested that its reputation for the product was intact. Its product accounted for six of the top ten products, which included the number one spot. The camera maker was a leader in accessory unit sales as it accounted for six of the top ten selling accessories. Another factor was that over 4.6 years of its content was uploaded in Alphabet Inc (NASDAQ:GOOGL)’s YouTube last year with its GoPro in the title. That was 22% higher than the preceding year.

Deal with Microsoft Corporation (NASDAQ:MSFT)

Most recently, both GoPro Inc (NASDAQ:GPRO) and Microsoft Corporation (NASDAQ:MSFT) struck a patent licensing deal. That came as a blessing in disguise for the camera maker as the market greeted the news. However, both companies’ preferred to keep the terms secret. Both said that the deal covered ‘some file storage’, as well as, other system technologies. Microsoft Technology Licensing president, Nick Psyhogeos, said that its licensing of personal wearable technologies was witnessing a robust demand as it was aligning with all industries to maximize solutions.

GoPro Inc (NASDAQ:GPRO) CEO, Nicholas Woodman, also tried to clarify the identity crisis. He said that until now the company was termed as an action-camera firm. However, he would prefer it to be known as the leading activity-capture company. The company has also decided to have only Hero 4 Black, Hero4 Silver, and Hero 4 Session in its line up thus chopping the cheaper devices for better focus. Currently, its valuations calls for better times for investors. For instance, price to earnings was 8.3 for GoPro whereas it was 18.1 for S&P 500. Similarly, the company’s stock price to book was 1.6 compared to broader Index’s 2.5.

Bear Case

One of the main reasons that it caught under the bear phase was the very high valuations accorded to it. GoPro Inc (NASDAQ:GPRO) stock commanded over 200 times of price to earnings while S&P 500’s was only 18.6. There were also high expectations from the analysts, as well as, investors. There were also doubts about the management since the management took the advantage of a higher price to lock their profit by offloading their stake. For instance, even its CEO, Nick Woodman, and other pre-IPO investors have resorted to selling approximately $797 million worth of shares through a follow-on offering. The company also sold $97 million worth of stock to add to its stockpile at the same time. Those insiders got a price of $75 per share. There were as many as 69 insider transactions that took place after the IPO. That does not provide a favorable investment picture for the normal investors. That also raised questions whether there was any hidden agenda.

Many worry that the company will reach market saturation with its camera portfolio and is a one-trick pony that will struggle to adapt. The company has to prove otherwise.

GoPro Inc (NASDAQ:GPRO)’s recent quarterly numbers were not on the expected lines. Also, its margins were under pressure continuously. Its gross margin dipped to 41.56% in 2015 from 52.32% in 2011 and 44.99% in 2014. Similarly, its EBIT margin dipped to 3.38% last year from 16.56% in 2011 and 13.42% in 2014. There is also doubt whether the company could achieve its guidance for the current year.

Conclusion

There are definitely some favorable factors like no debt and available cash. Its sharp drop in price might have moved GPRO to oversold. However, one of the reasons for the sharp drop in the price was the doubts about the management. It is the responsibility of GoPro Inc (NASDAQ:GPRO)’s CEO to steer clear of all misgivings about the company and the stock. Until then, uncertainty would continue to be there.  Despite the sound financial position there remains concerns about the company’s product portfolio and ability to drive growth in the future. With the stock price so low, the company certainly has a low bar of expectations to meet.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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