How does the old saying go? You should expect it when you least expect it?
The cliche may well apply to GoPro (NASDAQ:GPRO) at its current market cap, and in its current state. The long-beleaguered action camera company has been forgotten by some and written off by others. But, now that few people are actually looking, there's a chance the stock actually offers more upside than downside.
Obviously a chance isn't the same as a guarantee. GoPro could still steer itself back into trouble. It must navigate the next year with perfection, and continue to build the community that ultimately induces new, replacement, and upgrade purchases of its cameras. There's enough of a glimmer of hope, however, to revisit this riches-to-rags story.
The numbers are starting to work
In late 2014 -- shortly after its IPO -- GoPro's market cap reached a whopping $12 billion. The figure is far from unusual these days. But, it was unusual for the company at that time, simply because GoPro's top line would end up falling just short of $1.4 billion the same year. Net income wouldn't exceed $130 million. Investors were counting on enormous growth that would simply never happen.
Many of those investors paid the price for the bad bet. GoPro shares are now priced 95% below their 2014 peak, hitting another record low in March. The company finally turned a full-year profit in 2019, but it was a modest $35 million, with little assurance it could remain in the black.
There's a bullish thesis for GoPro, however, that's starting to hold a little water.
The crux of this thesis is the market capitalization resulting from the huge sell-off. Sitting at just 5% of 2014's maximum valuation, GoPro's current market cap of $750 million is appropriate given 2019's top line of $1.2 billion and non-GAAP (adjusted) net income of $35 million. Ignoring the unprecedented impact of the coronavirus that took a toll beginning in the first quarter, that translates into a trailing-12-month P/E of around 21. On a price/sales basis, GoPro is valued near 0.63, much lower than the average price/sales ratio of 2.16 that Yardeni reports for the S&P 500's constituents at the moment.
A palatable valuation only matters if a company can improve its underlying results, of course, but this is where things get interesting: GoPro is growing. Revenue is growing more predictably than earnings. In fact, the company had a huge fourth quarter, spurring year-over-year sales growth of 40% on the back of its then-new HERO8 Black and MAX action cameras.
A closer look at the company's recent historical numbers, though, indicates revenue growth is more common than uncommon. Ditto for income growth. Analysts expect both the top and bottom lines to continue improving too, and perhaps more importantly, continue to grow predictably once COVID-19 is in the rearview mirror. The earnings consensus for 2020 is a loss of $0.20 per share, reversing last year's swing to a profit of $0.24. But, assuming things return to normal by 2021, analysts are calling for earnings per share of $0.32 next year, to ramp up to a profit of $0.39 per share in 2022 on single-digit sales growth.
It's far from thrilling. The positive outlook, however, is believable given overdue changes the company's finally made to its operations.
Reshaped business model
The driving force of this new hope: GoPro's management team seems to have finally figured out it will have to steer action camera enthusiasts to a community of other GoPro owners, where they can share their videos and discuss ways to get more (and better) use of their cameras.
As of the end of the first quarter, which faced a COVID-19 headwind as it wound down, GoPro's Plus subscription service boasted 355,000 paying customers, up 14% from its headcount as of the end of last year. The Plus service itself isn't a huge profit center. As fellow Fool.com contributor Jon Quast pointed out in April, using GoPro's most optimistic expectations the service would only drive around $40 million in annual revenue. But, that's not the point. The community itself encourages the repurchases and upgrades by giving owners a place to share and get ideas about the hobby. The company also now boasts 44 million social media followers. Non-paid content -- videos and pictures made with GoPro cameras -- was viewed 243 million times during the first quarter, up 40% year over year.
All of it indirectly demonstrates the functionality of GoPro cameras in an organic way that could never be achieved through conventional marketing.
The other reason revenue and earnings growth should stabilize going forward is that GoPro has fully embraced direct-to-consumer sales. This level of interest in direct sales is a relatively new development.
Although direct-to-consumer has long been part of its revenue mix, CEO Nick Woodman commented during the fourth-quarter conference call that only 10% of 2019's top line was driven by direct sales. Just three months later, Woodman made a point of opening the first-quarter's results press release with the comment: "We've taken decisive action to transition into a more efficient and profitable direct-to-consumer business. This benefits GoPro with a substantially reduced operating expense model, improved gross margin and a significantly lower threshold to profitability." He added during the Q1 conference call he expects direct-to-consumer sales "to be around 45% [of GoPro's revenue mix] in 2020 and to increase further in 2021," eventually becoming the "majority of our revenue."
That would bypass retail partners, allowing GoPro to pocket not just wholesale profits, but the retailer's typical price markup as well.
Put it on your radar
It's still nothing to make a blind bet on, particularly until investors and analysts can fairly gauge the impact that COVID-19 may or may not make on its business. But, while few people were watching, GoPro quietly worked its way into a situation where its growth prospects are plausible and its valuation is palatable. Investors have certainly bought into weaker scenarios with unbridled confidence.
The smart move for now is simply putting it on your watchlist and waiting to see if the direct-to-consumer effort and community building can truly drive consistent growth. If it's going to happen, it should start to become evident by the end of the year.