$GPRO is Going Back to its IPO price
An update on my $GPRO thesis. A low-key monopoly, growing margins + annual recurring revenue (D2C shift + subs), reduced OPEX, pricing power, new management, awesome balance sheet and healthy cashflows. Also anomalously under priced, 300% upside from here IMO.
GoPro is perhaps the most unobvious turnaround story that we have seen in a while. Not because it is complex to understand what is going on within the company, but because investors across the board seem to be allergic to it. Try pitching GoPro to anyone and see the average reaction. This is what is keeping many from looking under the hood— the kind of dynamic that generates fantastic opportunities in the market. Meanwhile, the company is very much turning around, with substantial signs of progress over the last few quarters and a corresponding price action. I first wrote publicly about GoPro last November, in this post. Below, an update on my GoPro thesis and my take on why I think it will head back up to its IPO price.
A low-key monopoly
In my opinion, GoPro is the most evangelic brand out there after Apple. Their why is strong. GoPro is an inspiring brand with millions of highly loyal followers and customers. As evidence, consider that in FY 2019, GoPro captured 93% of the dollar share in the action camera market in the US. This is because GoPro presents one of those rare occurrences in which a brand has a strong why, that is well alligned with their what and their how. This alignment produces gravitas, which is per se the cornerstone of the long thesis — GoPro has such a strong brand that it acts as a moat. It´s not immediately obvious, but after getting close to the brand for a while, you may be able to see/feel it. The force is strong in this one.
Growing margins + annual recurring revenue
The company was previously focused on driving hardware sales. Now, it focuses on driving a digital subscription service, aswell as hardware sales, in an increasingly D2C format, versus its previous total dependency on retail. The subscription service is being turbocharged by cutting into the retailers´fees, that are now being bypassed by selling directly to customers. So for instance, if a retailer was previously taking in a fee of X$, that cut is now being leveraged in D2C online sales to funnel customers into the subscription service, via discounts on the hardware.
The subscription service has higher margins than hardware sales and enables the company to generate a growing annual recurring revenue. GoPro finished Q1 2021 with +1M subscribers (massive growth over 2020) and expects to exit FY 2021 with +2M of them. The net margin is estimated to be north of 50%, so 2M subs at 50$/year means an extra 50M USD for the bottom line. GoPro has tens of millions of followers on social media — 2M is by no means the ceiling.
But why should we care? Because, ladies and gentlemen, in this new crazy world content is cash. If you want to sell anything online, you need to create content to capture your audience´s attention. Video is the richest form of media / content type we have today and GoPro is increasingly a suite of solutions that enables video content creators to do their best work with minimal friction. Last week at Needham (transcript), the CEO was talking about how with the subscription, creators can simply put their cameras to charge at night and the content will be automatically pushed to the cloud, at the original quality. Creators can then pull the content from the cloud through the Quik app and work on it. This is the kind of magic we like and there is more to come. The subscription has opened an avenue for a growing stream of high margin digital services, that are going to make the lives of content creators easier every day. Growing margins are also a result of better hardware products, as I will explain in the opex section.
Reduced OPEX and Pricing Power
The company is as lean as it ever has been, but perhaps most interestingly, its putting out its best products to date. Why? We can probably infer that the company is better managed overall, but perhaps more specifically, that its R&D department has turned into some sort of lean high performing athlete. My takeaway from studying economic history is that culture really matters. When R&D turns into salable output, the culture tends to be right. The fact that GoPro is outputting its best cameras yet, with its lowest R&D spend yet, is quite a telling sign in my opinion. In synthesis, I believe GoPro is now much better at given their customers what they actually want by engaging GoPro Labs and actively seeking them out and listening to them, instead of branching out into business diluting products / diworsifications.
Coupled with its leanness, GoPro has proven to have pricing power, as evidenced by their rising ASP, at 366$ for Q1 2021, 4% increase YoY and their highest ever. GoPro cameras are the premium devices in their market. Content is cash, video is cash, premium video is more cash. This further contributes to margins.
I believe that unofficially, it is Bryan McGee that is actually running the company now. I have the biggest admiration for Nick Woodman, but he seems not to be the best operator out there (whilst he has succeeded in creating a massively evangelizing brand- I believe he is the source of GoPro´s vibe/moat). McGee seems to be a world class operator and I believe he is the source of GoPro´s renewed execution. I had a gut feeling about this back in November, but now I am quite sure. I believe he´s got what it takes to continue turning the boat around, whilst Nick makes sure the vibe is intact.
Awesome Balance Sheet + Healthy Cashflows
The business is increasing its margins, cutting costs and increasing revenue, but it´s also very healthy:
- It has more cash than debt. Debt is entirely convertible.
- Has good/improved inventory management, thanks to its shift to D2C.
- Is producing cash and is likely to have 500$m by the end of 2022.
GoPro is cashing in around 1$b in the TTM and it is only valued at 1.62$b today. Per the changing business dynamics, together with its healthy balance sheet and cashflows, I believe this company is very undervalued and that this in fact is obvious to anyone who takes the time to deeply analyze it — but most naturally write it off due its poor past performance.
I find that some back of the napkin models suggest that this stock is likely to be heading back into the +30$ zone over the next year or two. $GPRO´s P/S ratio today is 1.7, whilst $GRMN´s (Garmin, a similar company) is at 6.17. I am not implying that the market will assign $GRMN´s multiples to $GPRO, but we are likely to see something halfway, if they continue to execute well. Risks are plenty, as it may have occurred to you, but the opportunity is large whilst most investors continue to dismiss the company. Note that the company has done quite well during COVID, with its hardware unit sell through being much lower than in a normal year. The reopening is going to enhance all the above.