My take on GoPro, Inc.

A reader asked me about my thoughts on GoPro.

First a bit of information about the company profile and history.

GoPro, Inc. offers HERO line of capture devices, such as cameras; premium accessories, including battery BacPac, smart remote, and LCD touch BacPac accessories; and mounts comprising equipment-based mounts consisting of helmet, handlebar, roll bar, and grip and tripod mounts that enable consumers to capture content while engaged in a range of activities, as well as mounts that enable customers to wear the mount on their bodies, such as wrist housings, chest harnesses, and head straps.

The company was founded by Nick Woodman in 2002. Woodman started the company following a 2002 surf trip to Australia in which he was hoping to capture quality action photos of his surfing, but could not because amateur photographers could not get close enough, or obtain quality equipment at reasonable prices.

GoPro was listed on NASDAQ on June 25, 2014. At the IPO price the company was valued at $2.95 billion.

Its main product is the HD HERO cameras. As of October 2014 GoPro sells three fixed-lens cameras, two without viewfinders and one including a touchscreen viewfinder. In September 2014 GoPro announced the HERO4. The HERO4 Black (newest camera) have dimensions of 41 mm × 59 mm × 30 mm and weighs 88 grams. Click here.

My approach on companies not operating in Singapore is to first think about its narratives and business moat (then the financial fundamentals).

“Thinking about moats can protect your investment capital in a number of ways. For one thing, it enforces investment discipline, making it less likely that you will overpay for a hot company with a shaky competitive advantage. High returns on capital will always be competed away eventually, and for most companies—and their investors—the regression is fast and painful.”     Pat Dorsey, The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments

GoPro cameras are not your typical digital camera, instead they are ‘action cameras’ – compact, lighter, water-proof, shock-proof, crush-proof, high-definition, comes with multiple customised accessories (wearable & mountable) to ensure that you can wear them while doing high intensity outdoor activities. In fact, the desire to capture moments, the increasing use of social media and the importance of outdoor pursuits are taken as the main drivers of the action camera industry.

Case in point, I was at Marina Square recently and I can find GoPro in the Rip Curl Shop at level 2, but not in the camera section in Gain City. The Hero4 camera was selling for S$750.

Also GoPro mentioned that the customized accessories do form a substantial part of their revenue. Heard they are also go into drones. Check out the competitors out there – click here and here.

I have come across this company while reading up on US companies, however I did not study in depth into this company due to the following reasons:

1. It has a relatively short history as a listed company. The financial data I can find in Morningstar dates back to only 2011. So it is not possible to judge if it has a relative long consistent good financial performance. I can probably gauge that GoPro may do relatively well in the next 1to 3 years, but I would be clueless if you ask me about its performance for the next 10 years.
2. Its product is susceptible to technological advances (and not cheap). As an application of technology, the GoPro can seem miraculous. Nevertheless, although the camera’s technical specifications are impressive, it is also severely limited in comparison to a traditional SLR. There are 2 issues here: Firstly a moat is not easily achievable for products which require constant (technological) innovations & marketing. GoPro may have the first mover advantage but already there are competitors lining up, waiting to overtake it (read here). I am particularly intrigued by this 360fly camera. Click here.  Its technology could pose a major threat to GoPro. I won’t be surprised if people start switching to another brand which is cheaper, lighter, with longer battery life, higher resolution etc. Secondly, it is beyond my circle of competence. Action cameras cater to a specific group of people (who are into tech and outdoor activities) – which I am not. Yes, it comes in handy when you are skiing, cycling, sky diving, climbing a mountain edge or edge of an iceberg, walking towards the centre of a live volcano, driving a race car / motorbike, snorkeling, watching a rock concert, etc…. However, I just don’t see myself forking out  S$750 for a Hero4, or in other words, go pro anytime soon.
3. The products retail to the public (could be teenagers who are into outdoor activities, tech enthusiasts, etc). Business moats are harder to establish this way, because your customers could simply walk to the shop next door to buy your competitors’ products (or shop online). Coincidentally, I don’t see much of its competitor products in Rip Curl stores or other Travel stores – a matter of time perhaps. This is in contrast to companies catering to the specific needs of other companies as they would have an in depth knowledge of the needs and protocols of its customers, and able to provide specialised services or products to meet their needs. Also normally contracts are signed. Take the example of Precision Castparts, Boeing would find it difficult to replace Precision Castparts with another company (as the other company would then need to invest huge sum to fabricate specialized machinery and train staffs to make the products Boeing need. That is a lot of start-up risks). I see companies like Corning and Fasternal in this light.

“During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents and blue-jeans (Levi Strauss) made a nice profit.” Peter Lynch

I like to think about the downside risks prior to anything else. No doubt GoPro has achieved phenomenal success so far – but it is the future that is more important (for investors at least).

Having said that, there is a number of relatively ‘new’ companies (which were only recently listed in SGX) that have been getting a lot of media attention for their good performance. Example like Neo Group and ISOTeam. I am reluctant to invest in Neo Group due to its relatively short historical financial data available (although its business model seems good). I did not invest a lot into ISOTeam too.

However, compared to GoPro, I think these companies are less susceptible to the onslaught of technological advances, and have simple products and services. Also if you think about it, ISOTeam services cater primarily to corporate or statutory boards (HDB), while Neo Group is trying to target the more lucrative corporate catering sector. In a way, they try to create a stronger & more lasting moat.

“Avoid hot stocks in hot industries. Great companies in cold, no growth industries are consistent big winners.” Peter Lynch

• Three things that could derail GoPro (read here)
• This Is GoPro’s Plan to Continue Conquering the World (read here)

Ok, let’s look at GoPro financials.

The bad points:

1. P/E ratio is 40.81 (from POEMS 2.0). That is high, and definitely not cheap.
2. No dividend yield. Considered a high growth stock.
3. Its Price to Sales and Price to Book values are high. So not the value stocks one might like.
4. Its EV/EBITDA is high at 16.10 (As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value).

The good points:

1. It has a relatively good Return on Assets (more than 20%).
2. It has a very high Return on Equity (41.58%) which is good. Question is – is it sustainable?
3. It has no debt and a total cash level of USD516.98 million.
4. High current ratio (compares a firm’s current assets to its current liabilities).

What about its historical performance (although a relatively short one, from what is available to the public)?

Its historical free cash flows are erratic and does not exhibit a upward trend. Not good.

There is much historical ROA, ROE and ROIC to do any meaningful study.

PEG

As stated in Yahoo Finance, the PEG of GoPro is 0.65 (which is less than 1, and this is good).

Intrinsic Value

First, would like to highlight that, whatever figure I obtained for the intrinsic value for GoPro will be highly inaccurate due to the lack of historical data. There is just insufficient historical EPS and P/E to make an intelligent guess.

Let’s look at the estimated 5 years earning growth. When I go into ft.com, I can’t find the 5 years EPS growth rate (see below). In POEMS 2.0, the 3 yrs EPS growth rate is 100.8% (which is too short a period, and figures a bit too unrealistic I feel). Nevertheless, let’s assume a 20% discount to the 3 yr EPS growth figure, which will give us 80.64%.

Given EPS and a PE ratio, stock price can easily be calculated for any company. Using the below formula.

F = P(1+R)^N where:

• F = the future EPS
• P = the starting (present) EPS (1.17)
• R = compound growth rate (80.64)
• N = number of years in the future (5)

Estimated future EPS: 22.5

I will be estimating the future PE of GoPro to be 34.1 (See data from Morningstar below). Again, this will be highly inaccurate – unable to average the 10 years P/E.

Future Stock Price

P=EPSxPE

• P = future stock price
• EPS = future EPS
• PE = future PE

Hence, the future stock price of GoPro is 34.1 x 22.5 = 767.25

Intrinsic Value

P=F/(1+R)N

• P = present (intrinsic) value
• F = future stock price (767.25)
• R = MARR (15% or 0.15)
• N = Number of years (5)

Hence, the intrinsic value of GoPro is 381.

Stock price of GoPro, Inc. (GPRO) on 9 Sept 2015 is 37.50 .  There is a huge margin of safety (90%).

In summary:

I feel that this company has a relatively weak moat and is beyond my circle of competence. Moreover, its lack of consistent or long consistent historical financial data makes it hard to calculate its intrinsic value.

Although the PEG and Intrinsic values may suggest that the stock is undervalued, these values would be highly inaccurate. The long term risks far out-weight the potential upsides.

“The problem is that with so much attention being paid to the upside, it is easy to lose sight of the risk.”  Seth Klarman

I would not consider this company just yet.

As much as I like the Hero4 camera, when it comes to investing, I don’t see the need to be a Hero.

Risk aversion, on the other hand, allows an investor to keep a level head and take the time to do research — an approach most often attributed to women, but that’s also a hallmark of one very famous man. (read here – Why You Should Invest Like a Girl)