Is GoPro, Inc. Stock Too Expensive Right Now?

GoPro (NASDAQ: GPRO  ) is riding high after its recent initial public offering with shares up approximately 75% since its debut. And while GoPro should be commended for being one of the more-recent tech initial public offerings to report a profit, for a device manufacturer it still looks too expensive to me. 

GoPro is expensive
Call it IPO euphoria, call it a beneficiary of a good market, or call it luck -- there's no denying GoPro is expensive. Boasting a trailing 12 month net income of $48.6 million, the IPO valuation of $3 billion puts GoPro's price to earnings, or P/E ratio at 61 times. Expensive, absolutely! But then aggressive bidders further bid that ratio up above 100 times earnings.

It's hard to find a great comparison for this pure-play, high-growth camera company.  When compared to an existing camera company like Nikon (NASDAQOTH: NINOY  ) , one could one potentially understate GoPro's growth potential. When compared to a high-growth, multiproduct play, such as Apple, you overstate GoPro's limited reach. So in a comparison, it is good to look at all three companies.

Company GoPro Nikon Apple
Gross Margin 36.7% 35.6% 37.6%
3-year Net Income CAGR 72.4% 19.6% 38.2%
PE Ratio 102 13.3 16.2
PEG 1.38 .68 .42

Figures from last 10K/S-1: P/E Ratio current, PEG assumes future growth equals 3-year Net Income CAGR

As you can see, it isn't as if GoPro is special in any aspect, outside of a three year net income growth, but the company is rather ordinary when compared to these peers from a gross margin standpoint.

And as far as the net income growth is concerned, you are paying for it. The P/E ratio has been bid up so much that even if we assume GoPro replicates its amazing run of 73.4% per year for the next three years, its price/earnings to growth, or PEG, is more than double Nikon's and more than triple Apple's (lower is better here).

GoPro will have to sell many of their flagship Hero3+ Black Edition units to maintain these valuations. Source: GoPro

Of course, GoPro is working from a smaller base and should be able to increase its net income faster than the other companies, but we must also consider its market. The company boasts of selling 3.8 million cameras last year and 8.5 million since its existence. In a ceteris paribus world, to keep the top line growing like the last three years, the company would have to sell nearly 20 million cameras in 2017.

Possible saturation
Considering its current installed base of nearly 8.5 million, and the aforementioned growth, one has to worry about saturation. To maintain the current rate of growth, GoPro must sell 6.6 million, 11.4 million, and 19.8 million units over the next three years. That results in a total of 46.3 million units sold, or nearly 15% of the U.S. population.

And while the company boasts of selling products in nearly 100 countries and it increased its market share substantially in the last two years growing from a U.S. market share of 11% to 45%, a low-wage growth environment could discourage discretionary purchases, such as those for GoPro cameras. Also, when taking into consideration the threat of new entrants and current ones -- like Garmin -- this too will prove to be a difficult feat for GoPro.

Final thoughts
GoPro is the hot story right now and provides a great product. Personally, I like the company, but not at this price. For a consumer electronics hardware company there is simply not enough of a moat to justify the optimism priced into the stock. I'm keeping it on my radar, but I'm staying clear of the company for now.

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