GoPro Inc. for the long run?

Stock Analysis

GoPro(Ticker symbol — GPRO)is one of the leading manufacturers of the world’s most handy camera and enabler of some of today’s most immersive and engaging content. Its core product is the HERO line of capture devices, which was initially launched in 2009.

Also, GoPro provides advanced software solutions to enhance its core offerings such as GoPro Studio, GoPro App, among others. The GoPro App aids consumers to effortlessly and wirelessly manage and share content from their capture devices. The GoPro Studio enables customers to edit and share simple and complex videos.

GoPro follows both direct and distribution channel for selling its products. The direct channel (54.3% of total revenues in first-quarter 2020) comprises its website and various types of specialty retailers. The company uses the distribution channel (45.7%) to expand the reach of its offerings throughout national and international markets as well as in several specialty markets. GoPro operates through wholly-owned subsidiaries in Germany, Hong Kong, the Netherlands and the Cayman Islands.

  1. Subscription Revenue and Growing Exposure. GoPro has sold 700,000 cameras in first-quarter 2020. It aims to translate the healthy momentum in its business along with controlled cost into growth and profitability while limiting operating expenses. The company plans to enhance its Plus subscription service through enhanced benefits and user awareness and aims to work more closely with its retail partners, both in North America and abroad. GoPro’s Plus subscription service ended the reported quarter with 355,000 paid subscribers, up 69% from the prior-year quarter’s figure. Further, the organic viewership of GoPro content reached a record quarterly high of 243 million, up more than 40% from the year-ago quarter’s level. The company is also making investments in merchandising and retail advertising to drive a bigger brand presence while continuing to innovate. It intends to expand footprint in emerging markets like India and remains focused on scaling its CRM efforts to augment customer base.
  2. Long-Term Investments. GoPro intends to transform itself from the ‘camera maker’ to ‘content maker’ and has taken significant steps to diversify into higher-margin businesses including video editing and virtual reality. As of 1Q 2020, cameras with prices above $300 contributed 90% to revenues. The company is developing various types of software solutions and hardware to curtail the complexity of managing, editing and sharing contents on different media platforms. GoPro’s app Quik enables users to instantly edit their GoPro footage on their phones and create short videos for networking sites like Facebook and Instagram. The company also launched QuikStories, a new GoPro App feature that automatically copies footage from the user’s GoPro to their phone, and the GoPro App then creates a ready-to-share video. Additionally, the company is marketing the combined GoPro and smartphone experience to its existing community, which is focused on out-of-home, paid search and rich media, OTT videos designed to funnel conversions. I believe that these efforts will pay off in the long term, and go a long way toward opening GoPro to a wider audience and expanding the company’s user base.
  3. Extensive R&D. GoPro has been taking steps to solidify its position in the booming virtual reality (VR) market. It also announced additional software advancements with its new GoPro VR app. Its products seem well-positioned to dominate the trending VR market. Moreover, GoPro has been focusing on offering its immersive imagery video experience to millions of people across the world through its GoPro Channel. GoPro is collaborating with technology and content partners like Adobe and Fox Sports as well as content platforms like Facebook, to optimize the program. The program will allow content creators to generate revenue from their content and GoPro can license this content to global advertising brands to generate revenues. GoPro has been diligently working towards spreading its popularity across the spectrum, through concentrated and successful marketing efforts.
  1. Guidance Withdrawal. GoPro has withdrawn its 2020 guidance due to uncertainties on the COVID-19 pandemic. The company faced multiple operational stumbles including product recalls, troubled launches, production delays and missed deadlines in the past. The action video camera maker’s global distribution network has been severely impacted by the COVID-19 pandemic. As a result, there was a year-over-year increase in the inventory. As of Mar 31, 2020, GoPro had $172 million in inventory compared with $119 million on Mar 31, 2019.
  2. Highly Competitive Market. GoPro operates in a highly-competitive camera and camcorder market. The market has an extensive presence of well-known camera makers such as Canon, Nikon and Olympus. Also, many electronics giants like Sony, Samsung and Panasonic have penetrated capture devices market, thereby pushing the level of competition a notch higher. GoPro’s market share has been threatened by lower-cost alternatives from established industry players like Sony, Xiaomi, Garmin, HTC as well as new entrants, which have led to the increasing commoditization of action cameras. This commoditization hurts GoPro’s premium brand image, and impacts prices and margins.
  3. The strain on Margins. To maintain its dominant market share, the company continues to spend a significant amount on R&D, which strain margins. Although it is utilizing R&D more efficiently, increasing competition has put the pricing under pressure, as evidenced by the company’s recent pricing actions. Additionally, as GoPro operates in the consumer goods sector, it has to considerably invest in advertising and marketing, as failure to do the same impacts consumer demand.
  4. Debt-laden Balance Sheet. As of Mar 31, 2020, the company had $125 million in cash and cash equivalents with $212 million of long-term debt. Consequently, this highly leveraged balance sheet is more likely to inflate the company’s financial obligations and hurt profitability. Also, its debt-to-equity ratio has increased sequentially from 0.95 to 1.41. This indicates that GoPro is likely to be more dependent on debt-financing to generate earnings in the near future, which is often associated with high risk. Although the company has a favourable cash ratio, its multiplied interest earned has declined significantly to -1.9, which indicates that GoPro is unlikely to clear its debt in the near term.

To determine the Intrinsic Value of GoPro I used the Discounted Cash Flow (DCF) method. DCF uses GoPro’s Free cash flows, which represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets and estimates the value of the investment to project it’s future cash flows and justifies the price we pay now for this expected return.

The company currently has negative cash-flow therefore it’s impossible to mathematically predict it’s future earnings power.

This is important as it shows discipline within management and compensates the stockholder for trusting the company with their money. An excessive offload of profits to investors via dividends can signal a loss of vision within management and their inability to seek growth. No dividends can also be destructive as holding onto profits might lead to excessive executive compensation, sloppy management, and unproductive use of assets. For the average investor, the money they have in the stock can be seen as more trustworthy when it makes its way into the shareholders pocket.

Unfortunately, GoPro Inc. currently doesn’t pay any dividends.

Net Losses

On a GAAP basis, net loss in the March quarter came in at a loss of $63.5 million or 43 cents per share that is wider than a loss of $24.4 million or 17 cents per share in the year-ago quarter. The year-over-year deterioration was primarily caused by lower revenues and income tax expenses in the reported quarter.

Quarterly non-GAAP net loss came in at a loss of $49.6 million or 34 cents per share compared with a loss of $10.2 million or 7 cents per share in the year-ago quarter.

Revenues

GoPro reported unimpressive first-quarter 2020 results, with the bottom line and top line deteriorating on a year-over-year basis. However, direct-to-consumer operating model and accretive subscriber base were tailwinds amid the COVID-19 crisis.

GoPro generated revenues of $119.4 million, down 50.8% from $242.7 million in the year-ago quarter. In spite of in line preliminary results, the year-over-year decline in revenues was mainly caused by adversities induced by the COVID-19 pandemic. Nevertheless, the company witnessed an upward sell-through trend of GoPro Cameras amid this crucial hour.

Markedly, GoPro’s Plus subscription service ended the reported quarter with 355,000 paid subscribers, up 69% from the prior-year quarter’s figure. Further, the organic viewership of GoPro content reached a record quarterly high of 243 million, up more than 40% from the year-ago quarter’s level.

Revenues from Americas came in at $57.3 million (47.9% of total revenues), down 47.5% from $109.1 million in the year-ago quarter. Revenues from EMEA were $29.7 million (24.9%), down 58.1% from $70.9 million and APAC generated $32.4 million (27.2%), down 48.3% from $62.7 million.

Revenues from Direct channel were $64.9 million (54.3% of total revenues), down 41.5% from $110.9 million. Revenues from Distribution channel came in at $54.5 million (45.7%), down 58.6% from $131.8 million year over year.

GoPro shipped 341,000 camera units during the reported quarter, down 59.5% year over year. The company had $172 million in inventory compared with $119 million in the year-ago quarter. Non-GAAP gross margin remained flat at 34.2% from the prior-year quarter’s level, driven by the implementation of direct-to-consumer operating model. Impressively, cameras with prices above $300 contributed nearly 90% to revenues in the reported quarter.

Cash Flow & Liquidity

During the first three months of 2020, GoPro utilized $68.3 million of net cash for operating activities compared with $65 million of cash utilization in the year-ago quarter. As of Mar 31, 2020, the company had $117.4 million in cash and cash equivalents with $151.4 million of long-term debt

GPRO’s Debt-to-Equity is ranked lower than 92% of the 2030 Companies in the Hardware industry.

GoPro’s Short-Term Debt & Capital Lease Obligation for the quarter that ended in Mar. 2020 was $39 Mil. GoPro’s Long-Term Debt & Capital Lease Obligation for the quarter that ended in Mar. 2020 was $212 Mil. GoPro’s Total Stockholders Equity for the quarter that ended in Mar. 2020 was $177 Mil. GoPro’s debt to equity for the quarter that ended in Mar. 2020 was 1.41.

A high debt to equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

During the past 9 years, the highest Debt-to-Equity Ratio of GoPro was 2.28. The lowest was -21.17. And the median was 0.76.

Debt-to-Revenue measures a company’s ability to pay off its debt.

GoPro’s annualized Revenue for the quarter that ended in Mar. 2020 was $478 Mil. GoPro’s annualized Debt-to-Revenue for the quarter that ended in Mar. 2020 was 0.52.

GPRO’s ROE % is ranked lower than 89% of the 2218 Companies in the Hardware industry.

ROE % is calculated as Net Income attributable to Common Stockholders (Net Income minus the preferred dividends paid) divided by its average Total Stockholders Equity over a certain period of time. GoPro’s annualized net income attributable to common stockholders for the quarter that ended in Mar. 2020 was $-254 Mil. GoPro’s average Total Stockholders Equity over the quarter that ended in Mar. 2020 was $206 Mil. Therefore, GoPro’s annualized ROE % for the quarter that ended in Mar. 2020 was -123.65%.

During the past 9 years, GoPro’s highest ROE % was 35.10%. The lowest was -68.75%. And the median was -24.63%.

ROE % is calculated as Net Income attributable to Common Stockholders (Net Income minus the preferred dividends paid) divided by its average Total Stockholders Equity over a certain period.

ROE % measures the rate of return on the ownership interest (shareholder’s equity) of the common stock owners. It measures a firm’s efficiency at generating profits from every unit of shareholders’ equity (also known as net assets or assets minus liabilities). ROE % shows how well a company uses investment funds to generate earnings growth. ROE %s between 15% and 20% are considered desirable.

Because a company can increase its ROE % by having more financial leverage, it is important to watch the leverage ratio when investing in high ROE % companies.

GPRO’s ROA % is ranked lower than 83% of the 2282 Companies in the Hardware industry.

ROA % is calculated as Net Income divided by its average Total Assets over a certain period of time. GoPro’s annualized Net Income for the quarter that ended in Mar. 2020 was $-254 Mil. GoPro’s average Total Assets over the quarter that ended in Mar. 2020 was $708 Mil. Therefore, GoPro’s annualized ROA % for the quarter that ended in Mar. 2020 was -35.90%.

During the past 9 years, GoPro’s highest ROA % was 18.87%. The lowest was -41.37%. And the median was 0.81%.

ROA % is calculated as Net Income divided by its average Total Assets over a certain period.

ROA % measures the rate of return on the total assets (shareholder equity plus liabilities). It measures a firm’s efficiency at generating profits from shareholders’ equity plus its liabilities. ROA % shows how well a company uses what it has to generate earnings. ROA %s can vary drastically across industries. Therefore, ROA % should not be used to compare companies in different industries. For retailers, ROA % of higher than 5% is expected. For example, Wal-Mart (WMT) has ROA % of about 8% as of 2012. For banks, ROA % is close to their interest spread. A banks ROA % is typically well under 2%.

Fluctuations in the company’s earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective. ROA % can be affected by events such as stock buyback or issuance, and by goodwill, a company’s tax rate and its interest payment. ROA % may not reflect the true earning power of the assets.

Many analysts argue the higher return the better. Buffett states that high ROA % may indicate vulnerability in the durability of the competitive advantage.

ROIC % measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called ROC %. GoPro’s annualized return on invested capital (ROIC %) for the quarter that ended in Mar. 2020 was -67.17%.

As of today (2020–07–12), GoPro’s WACC % is 9.09%. GoPro’s ROIC % is -10.35% (calculated using TTM income statement data). GoPro earns returns that do not match up to its cost of capital. It will destroy value as it grows.

ROIC % measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called ROC %. The reason book values of debt and equity are used is because the book values are the capital the company received when issuing the debt or receiving the equity investments.

There are four key components to this definition. The first is the use of operating income or EBIT rather than net income in the numerator. The second is the tax adjustment to this operating income or EBIT, computed as a hypothetical tax based on an effective or marginal tax rate. The third is the use of book values for invested capital, rather than market values. The final is the timing difference; the capital invested is from the end of the prior year whereas the operating income or EBIT is the current year’s number.

Why is ROIC % important?

Because it costs money to raise capital. A firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.

GoPro’s Owner Earnings per Share (TTM) ended in Mar. 2020 was $-0.69.

What are the Owner’s Earnings?

In 1986 Berkshire Hathaway Shareholder Letter, Warren Buffett defined owner earnings as follows:

“These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges…less c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in c))…Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since c) must be a guess — and one sometimes very difficult to make. Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes — both for investors in buying stocks and for managers in buying entire businesses…All of this points up the absurdity of the ‘cash flow’ numbers that are often outlined in Wall Street reports. These numbers routinely include (a) plus (b) — but do not subtract c).”

To make it simple, you will have:

Owner Earnings per Share (TTM) = (Net Income + Depreciation, Depletion and Amortization + Change In Deferred Tax — 5Y Average of Maintenance Capital Expenditure + Change In Working Capital) / Shares Outstanding (Diluted Average)

GoPro intends to expand its footprint in emerging markets and is focused on scaling CRM efforts. The action video camera maker aims to translate the business momentum and controlled cost into growth and profitability. It benefits from a robust portfolio and direct-to-consumer operating framework with a Plus subscription service. GoPro sold 700,000 cameras in the first quarter of 2020. However, GoPro spends a considerable amount on R&D, which dents margins. It generates the majority of revenues from capture devices, in turn facing product concentration risk. Constrained demand due to COVID-19-induced market downturn and price cuts might impact the top line in the coming quarters. Highly-competitive camera and camcorder market is also a major headwind.

GoPro Inc. Q1 2020 Earnings Call/Presentation and Fiscal Year 2019 Results, GoPro Inc. Form 10-K, GuruFocus, SeekingAlpha and predictions made by the Author’s understanding of the company.

This report contains independent commentary to be used for informational purposes only. The analyst/author contributing to this report does not hold any shares of this stock at the time of writing. The analyst/author contributing to this report does not serve on the board of the company that issued this stock. Additionally, the analyst/author contributing to this report certify that the views expressed herein accurately reflect the analyst’s/author’s personal views as to the subject securities and issuers.

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Sai Penukonda

Sai Penukonda

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