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Better Buy: GoPro, Inc. vs. Alphabet

By Tim Brugger - May 11, 2017 at 10:18AM

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The two tech leaders in their respective sectors are heading in decidedly different directions.

Things could be going better for action camera leader GoPro (GPRO 0.54%). To his credit, GoPro founder and CEO Nicholas Woodman hasn't sat idly by as his Karma drones fell from the sky, or as sales continued spiraling downward. Woodman's cost-cutting initiatives implemented just a quarter ago are already showing results, and Karmas are back in the clouds and seemingly selling well.

As for Alphabet (GOOG -0.27%) (GOOGL -0.21%), what can you say? The search behemoth continues to grow at a ridiculously phenomenal rate considering its size. And with plans to energize its wildly popular YouTube asset with upcoming original shows, not to mention its "other bets" unit, Alphabet is sitting on numerous growth opportunities over and above its world-beating search advertising revenue.

Investors interested in getting in on a turnaround story might be considering GoPro, but is it really a better buy than the search giant?

GoPro's HERO5 action camera.

HERO5 action camera. Image source: GoPro.

The case for GoPro

One of the immediate objectives of GoPro is to cut overhead to help offset lower than expected sales, and it's working. Last quarter GoPro shaved nearly $25 million in operating expenses, though that effort was undermined somewhat by a $26 million plus increase in cost of revenue.

On a more positive note, GoPro's $218.6 million in revenue in the first quarter was good for a 19% jump year over year, and losses decreased to $0.44 a share excluding one-time items compared to a loss of $0.63 a share last year. 

The resurgence of the Karma drone, particularly with GoPro's wildly popular Hero5 camera onboard, was the number two best-selling drone priced over $1,000 in the U.S. last quarter, and sales in Japan more than doubled. On the not so positive side, GoPro's balance sheet is taking a hit as it reinvents itself.

A year ago GoPro had approximately $218 million in cash and equivalents, but this past quarter readily available cash dropped to $74.9 million, and that's after issuing $175 million of convertible notes. That said, Woodman is confident GoPro can meet its objective of "returning to full-year non-GAAP profitability in 2017." So far, so good.

Considering GoPro's price-to-sales (PS ratio) is a mere 1, it could be argued it's a value, but the company still needs to do a lot to right the ship and return to consistent growth.

Google's self-driving car driving down a road.

Google's self-driving car. Image source: Alphabet.

The case for Google

Fans of Alphabet, formerly known as Google, may recall it wasn't even a year ago that pundits were bemoaning its continually declining cost-per-click results. The drops in per-click revenue were viewed by some as a precursor to an inevitable slowing in top-line growth. As Alphabet demonstrated again last quarter, bearish investors needn't worry.

Yes, cost-per-clicks dropped again last quarter, this time by 19% year over year. But sheer volume more than made up for the declining ad prices. Alphabet generated an astounding $22.75 billion in revenue for the quarter, up 22% compared to a year ago. For comparison's sake, Alphabet's PS ratio of 7.24 may not offer the value, but it speaks to investor's confidence in continued, sky-high sales growth.

What makes Alphabet's meteoric growth so impressive is that with a market capitalization well over $600 billion, it's one of the largest companies on the planet, yet it's still growing like a hot tech upstart. Thanks in part to strict expense management and improved operating margins -- which increased to 27% last quarter versus 26% a year ago -- earnings-per-share (EPS) soared 28% to $7.73.

Such stellar performance nearly across the board makes it easier to swallow Alphabet's ongoing losses from its Other Bets division. Sales did increase 48% to $244 million, but operating losses for the division focused on cutting-edge technologies including self-driving cars and internet balloons jumped 10% to $855 million.

And the better buy is...

Despite GoPro's rough 2017, Woodman has the action camera leader on the right path. It will likely be a year or more until GoPro is truly "back," but don't be surprised to see it, and its stock, return to investor's good graces before long.

That said, there's simply no stopping Alphabet. As the world becomes increasingly more connected even more people will look for answers by "Googling it." For a company of its size and scope to grow as it does is astounding. For that reason, Google is the hands-down better buy.


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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
$2,174.75 (-0.21%) $-4.51
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,181.62 (-0.27%) $-5.83
GoPro, Inc. Stock Quote
GoPro, Inc.
$5.56 (0.54%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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