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Better Buy: GoPro, Inc. vs. Alphabet

By Steve Symington – Nov 16, 2016 at 8:53AM

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The internet search juggernaut and the action-camera specialist have had two very different years. Here's what investors need to know.

In March, I explored the merits of buying shares of two very different companiesGoPro, Inc. (GPRO -2.99%) and Google parent Alphabet (GOOG -1.53%) (GOOGL -1.48%).

More specifically, I wanted to know which was the better buy. On one hand was Alphabet, the $250 billion holding company whose business is primarily driven by the world's undisputed leader in internet search. And on the other hand was GoPro, an action-camera specialist with a market capitalization of less than $2 billion at the time -- thanks to a precipitous decline in its share price as demand for its cameras had waned -- but which also looked forward to a potential turnaround with impending launches of crucial new products including its Hero 5 cameras and Karma quadcopter.

Image source: Getty Images.

A tale of two growth stories

While I admitted at the time the prospect of owning GoPro was enticing given its great potential for outsized growth, I settled on Alphabet as the better buy due to the combination of its relative stability and financial fortitude, as well as the growth potential for its still-unprofitable "Other Bets" segment. More specifically, I wrote that Alphabet's "stability, superior growth, and global market leadership are too great to ignore, and for me this becomes more a core stock around which investors can build a portfolio."

For perspective, here's how shares of GoPro and Alphabet have fared since I last compared the two:

GPRO Total Return Price Chart

GPRO/GOOG/GOOGL Total Return Price data by YCharts.

Alphabet's relative stability is obvious, but it still only resulted in modest 2% gains since my last article. Meanwhile, GoPro has taken investors on a roller-coaster ride in recent months, climbing as much as 40% over the same period only to find its stock down more than 15% as of this writing.

So let's see what happened between then and now. And more importantly, let's see if it changes my original decision.

GoPro's dilemma

First, GoPro stock obviously appeared to be the superior bet as late as last month. The company had left investors giddy after the formal introduction of two new Hero 5 cameras and its new Karma drone in mid-September. And both products were made available in retail stores by the end of October. In addition, thanks to management's comments regarding full teams working on "future products that'll be pretty incredible," I was looking forward to seeing how GoPro would improve on the first version of Karma with key features down the road.

When GoPro's third-quarter report arrived earlier this month, however, things took a drastic turn for the worse as quarterly revenue plunged nearly 40% year over year and translated to an adjusted net loss of more than $84 million -- both figures coming in significantly below expectations. To blame, according to CEO Nick Woodman, were production issues resulting in lower-than-expected launch volumes for Karma and the high-end Hero 5 Black camera.

Worse yet, Woodman warned GoPro would have difficulty catching up to meet demand in the crucial holiday season, which could deprive the company of badly needed financial breathing room amid it turnaround efforts. And even worse still, a few days after its quarterly report GoPro recalled all 2,500 Karma drones sold since launch, stating a very small number of those units were reported to have unexpectedly lost power during flight. GoPro is not offering replacement units, either, as it works to identify the problem. 

As it stands, though GoPro was wise to nip the Karma issue in the bud with a prompt recall, it won't do the company any favors in its quest to return to sustained, profitable growth.

More of the same from Alphabet

Meanwhile, Alphabet stock seems to be stuck in neutral despite the internet search titan posting three consecutive strong quarterly reports in April, July, and late last month.

But that's not to say Alphabet isn't trying to reward shareholders in the meantime. In its most recent quarter, revenue climbed 20.2%, to a stunning $22.45 billion, including a 3% headwind from foreign exchange. That resulted in 24.2% growth in adjusted operating income, to $7.6 billion, while adjusted net income climbed 24%, to $6.3 billion -- with each figure arriving well above Wall Street's expectations. Alphabet CFO Ruth Porat credited their outperformance largely to strength in mobile search and video from YouTube, which are together powering Google's core advertising business forward.

As if that wasn't enough, Alphabet completed all share repurchases under its previous authorization in the second quarter, then authorized a new repurchase program of up to $7,019,340,976.83 in shares. In case you're wondering about the specific number, it's a delightful math joke: 7019.34097683 is equal to 26 (the number of letters in the alphabet) to the power of e, an important mathematical constant.

Finally, Alphabet's Other Bets segment -- which includes Fiber high-speed internet, Nest connected home products, Verily longevity solutions, Calico life sciences products, and X "moonshot" initiatives -- saw its revenue continue to climb (up almost 40%, to $197 million), and its operating loss narrow significantly (from $980 million to $865 million) from the same year-ago period.

That's not to say Other Bets will continue along this same trajectory from quarter to quarter. Alphabet management regularly reminds investors the most "instructive" way to view them is through a long-term lens, as they're primarily comprised of pre-revenue businesses spread across several disparate industries. But if even one of Alphabet's Other Bets can garner the same industry leadership and traction as its core search and advertising platform already has, these near-term losses will prove more than worth its while.

The verdict

In fact, I could find almost nothing not to like in each of Alphabet's three quarters following my last "better buy" article. So if it's not already obvious at this point, I'm sticking to my guns -- and in an even more definitive fashion than last time -- in declaring Alphabet stock the superior portfolio option over GoPro.

Again, however, I'll admit that if GoPro manages to right its wrongs (particularly if it's underpromising for the key holiday quarter), there could be room for massive upside as the market responds in kind. But if the company doesn't pull out of its funk and resolve its production issues in time, GoPro stock could also easily continue to fall. As such, I'm much more confident in betting that Alphabet stock will achieve market-beating gains going forward.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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