Many investors remember GoPro (GPRO 2.76%) as a failed company. It was a popular stock around its initial public offering (IPO) in 2014, reaching close to $100 a share before crashing down to almost $2 over the next five years. The company made numerous mistakes that led its stock price to crater and its business to stagnate. However, it just might have turned the corner, buoyed by the growth of its direct-to-consumer (DTC) business and subscription offerings.
Investors have taken note, driving the stock up over 400% in the last year alone. Here's why GoPro stock may be due for a turnaround.
What went wrong
A lot of things went wrong with GoPro. At the time of its IPO, it tried to do too much too fast, all while losing market share to the ever-increasing quality of smartphone cameras from Apple (AAPL 2.54%) and Samsung. It started a media division around some of GoPro's big creators (the YouTube channel still has more than 10 million subscribers), but that fizzled out and the entire unit was shut down in 2016. With competition from smartphones and stagnating sales, management had to consistently lower prices on its cameras, which further hurt GoPro's profitability or lack thereof. Lastly, it entered the virtual reality and drone markets, which were total failures and never gained any market traction.
All in all, it looks like GoPro lost focus and didn't have much of a plan (or one that worked) after its IPO.
Why the future could be different
GoPro made a lot of mistakes in the past, but that doesn't mean the company is going to continue floundering in the future. Over the last few years, management has streamlined its hardware/accessories business. It now sells only a few cameras at a premium price point and accessories/tools that go along with them like mounts, batteries, and cases. This focus has worked, with the average selling price of its cameras growing 13% in 2020 vs. 2019. GoPro is also rapidly transitioning to a DTC selling model. In the fourth quarter of 2020, 33% of GoPro's sales came from its DTC channel, GoPro.com, vs. only 12% in 2019. This should help GoPro improve its profitability and establish a more direct relationship with its customers.
While all those things are nice, the most important part of GoPro's future is its subscription service, aptly called the GoPro subscription. The $50 a year service offers unlimited cloud storage, discounts at GoPro.com, free camera replacements, and access to its new editing app called Quik (consumers can also subscribe to Quik on their own for $10 a year). At the end of 2020, GoPro had 761,000 subscribers, up substantially from 311,000 a year ago.
The company's financials as a whole suffered in 2020, due to a decline in camera demand because of the pandemic (there's not much to film if you are just stuck at home all day). However, when you consider that the average selling price, DTC revenue share, and subscriptions were all growing, GoPro's 2020 looks a lot better than the headline numbers suggest.
At a market cap of $1.85 billion, GoPro trades at a price-to-sales ratio (P/S) just north of 2. It is still not profitable, so it can't be valued on a price-to-earnings ratio (P/E). However, if you look at the unit economics of a GoPro subscription, things start to look a lot rosier. According to management, for every million subscribers GoPro gets, that equates to $50 million in revenue with a 50% operating margin (so $25 million in operating profit). If it can get just a few million subscribers (it is already close to 1 million), that would build a lot of momentum for the stock and create a durable, recurring revenue stream for GoPro to build from. And this is discounting GoPro's traditional hardware business, which still makes up the majority of its sales, albeit at a lower operating margin.
Overall, it looks like GoPro's business is in a lot better shape than a few years ago. Investors should still stay cautious, as the company needs to prove there is a large enough market for its new subscription offering. But if GoPro is successful in building out its new hardware/software ecosystem while also transitioning to a DTC model, we may look back and think a $1.85 billion market cap was an absolute bargain for long-term investors.