GoPro (NASDAQ: GPRO ) is doing something that has never been done before: selling cameras to users with the intent of using those cameras as "capture devices" to generate content for a media network, the GoPro Network. This video transition from raw cut to final edit is facilitated by GoPro Studio and the GoPro App, both of which serve as a platform to make the video management and editing process seamless for users. (It's worth noting that users have downloaded both Studio and App millions of times, with users exporting 20,000 videos per day through GoPro Studio.)
In the words of GoPro founder and CEO Nick Woodman, GoPro aims to utilize its user base as the "world's largest production force." Woodman, who is 38 years old and owns 46.7% of all shares outstanding himself, for a total of 56.59 million shares, has a clear passion for GoPro and carrying out the company's vision. Woodman is an extraordinary entrepreneur and exactly the passionate leader I like to see at the helm of a young business. Let's take a deeper look at GoPro's financials and prospects as an investment.
Solid financial performance and product innovation
Over the past four quarters ended June 30, GoPro brought in $1.03 billion in sales with a net income of $33.8 million. Revenue grew at a compounded annual rate of 148.2% over the past three years through 2013, including 87.4% growth in 2013. In the most recent quarter, total revenue grew 38.1% year over year to $244.6 million. GoPro's cameras are sold in more than 100 countries, and as of the first quarter of 2014, 53% of sales came from outside of the United States, up from 35% in 2011.
Top-line growth is always nice to see, but what especially impresses me about GoPro is the company's free cash flow production. GoPro produced $13.2 million in free cash flow in 2011, but that number has since ballooned to $89.4 million over the past four quarters. This free cash flow production has helped GoPro maintain a healthy balance sheet of $104.9 million in cash with $41.4 in debt, making for a net cash position of $63.5 million. (That does not include the $200.8 million in cash GoPro raised from its June IPO.) In other words, GoPro is producing sufficient cash to finance product development as well as expansion into its content and media segments.
GoPro is plowing money into product development, with R&D expenses increasing 121% year over year in the first two quarters of 2014 to $63.4 million. Approximately 300 of GoPro's 800 employees are focused solely on product development. Of those 300, roughly two-thirds are focused specifically on the development of hardware -- the design, look, and functionality of the video cameras. The other 100 or so employees are focused on software development, including content management and platform-based software -- initiatives relating to the GoPro Studio, GoPro App, and GoPro Network.
The company is already producing free cash flow to fuel this innovative focus, although it will probably result in sporadic performance of the bottom line in the shorter term. That means we'll probably see higher multiples and more volatility with the stock, which shouldn't bother Foolish investors focused on long-term results. GoPro is quickly growing under the guidance of a passionate, dedicated, and invested leader, and generating solid financial performance in the process.
Risks and valuation
No investment comes without its risks. GoPro's media platform is still in its infancy and won't generate revenue in 2014. If this move toward media goes kaput, GoPro's growth prospects and strategy will be seriously dented. In addition, GoPro must continue to innovate and expand its line of products. The company clearly prioritizes R&D, as we've seen, but that's no guarantee that GoPro won't be susceptible to competing technologies and other disruptive upstarts in the future.
GoPro is currently valued at $5.5 billion, trading at a price-to-sales ratio of 5.3 by my calculations. The price-to-earnings ratio sits at 137, but keep in mind that this figure reflects the company's investments into R&D, which reduces the bottom line. GoPro is trading at a price-to-free cash flow multiple of approximately 87. The stock isn't cheap by many measure, and much is riding on the company's future performance. Investors today must recognize that the stock will be volatile and the company must perform very well in the coming years to deliver market-beating results to investors.
Foolish bottom line
GoPro's unique strategy -- a mix of hardware and software focuses -- and its growing community of users will be difficult for any other camcorder or media channels to replicate. If GoPro can build and scale this media platform, sales growth should continue at rates that justify a premium valuation while outperforming the market.
With GoPro we have a rapidly growing business dominating a market that it largely created on its own: versatile cameras and the "video selfies" movement. I would be very hesitant to bet against the tenacity and passion of Nick Woodman, who has led GoPro to $1 billion in sales in just 10 years. Woodman's vision, backed by a growing community of millions of GoPro users and counting, is exactly what Foolish investors should be watching.