Is GoPro Stock Fairly Valued?

GoPro (NASDAQ: GPRO  ) has been the most recent company to steal the IPO spotlight in 2014. With an initial offering price of $24, shares quickly rocketed higher, hitting $48 in less than a week. 

The stock has started to cool down (currently near $43), but still, investors are valuing the company at $5.3 billion. Let's take a closer look at this company, which appears to be overvalued at current levels. 

What is GoPro?
GoPro makes "the world's most versatile cameras" that are generally used for action-packed adventures, like skydiving, surfing, and mountain biking. Have a look below to get an idea of what these cameras attempt to capture:

From a consumer's standpoint, these little wearable cameras are incredible! It allows users to capture themselves or their surroundings in a way that was never before possible. But from an investor's standpoint, there comes an important question: valuation. 

A look into the company's financial results 
Here's what GoPro has generated in revenues and net income in each fiscal year starting from 2011:

Year Revenues Revenue Growth Net Income Net Income Growth
         
2011 $234 million -- $24.6 million --
2012 $526 million +124% $32.2 million +31%
2013 $986 million +87.4% $60.6 million +87.8%

Source: GoPro's S-1 filing.

Before moving on, let's take a look at the first three quarters of 2014, compared to the first three quarters of 2013:

Metric Q1 2013 Q1 2014 Change (year-over-year)
       
Revenue $255 million $235 million (7.8%)
Net Income $23.03 million $11.05 million (52%)

Source: GoPro's S-1 filing.

Those year-over-year quarterly results don't look very good. What gives? Despite how poorly the above quarterly figures look, the company explained this in the filing. It reasoned that because of delays in its Hero3 camera, it pushed a lot of 2012's fourth-quarter sales into the first quarter of 2013. 

As a result, 2013's first-quarter results look great, while 2014's first-quarter results look meek. However, this does "not reflect the traditional seasonality in our business," the company stated in its S-1 Filing

This sales flow into the first quarter of 2013 isn't really a big deal. However, it makes the year-over-year growth from 2012 to 2013 look better than it actually was, and 2014's apparent first-quarter growth slump look worse than it actually is. This is something for investors who are overly bullish or overly bearish to keep in mind.  

So, where does the valuation stand?
A company that is growing revenues and net income the way GoPro appears to be obviously deserves some sort of premium. But with newly public companies, it can be hard to value, especially since it lacks so many traditional valuation metrics.

GoPro, a consumer cyclical company, trades at an eye-popping 5.8 times last year's sales. A price-to-sale, or P/S, ratio of 5.8 is far higher than the sector average of 1.1 times sales. And while I do believe GoPro deserves a premium to many of its peers, this is not what I had in mind. Near 3 to 3.5 times sales, I would find the stock more attractive. 

In other words, with if GoPro trades in-line with sector peers at a P/S ratio of 1.1 times sales, it will need to increase sales over five times to $5 billion to maintain the same market cap as today. To me, this designates a stock as overvalued. 

Furthermore, when looking at the company's diluted earnings per share, as per GoPro's S-1 filing, one will notice that it was $0.47 per share. It's good to see that it's at least profitable.

However, on a trailing-12-month basis, that puts GoPro's P/E ratio at 92 times last year's earnings. And remember, 2013's numbers were inflated because of the strong first quarter, (meaning 2013's earnings per share is higher than it should have been). The average P/E ratio for the sector is 28. 

Final thoughts
I really like GoPro from a consumer's standpoint, and I love the business from an investor's standpoint. However, good products and a good business don't necessarily translate into a good investment when the valuation is factored in. I simply cannot justify paying these sorts of premiums for a pair of boots the company will take years to grow into. 

At today's levels, it will take GoPro years just to grow into a fully valued investment. If the stock were to decline to $30 -- roughly 30% lower from today's levels -- then I would take a look at it on the long side. 

At $30 per share, it would trade near 3.75 times last year's sales, which is still quite a premium to the sector average. However, given GoPro's rapid growth, I would feel more comfortable paying this type of premium for it, than the type of premium being demanded at today's valuation. 

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