1 Small-Cap Growth Stock That Could Soar, According to Wall Street

If you were told to buy a stock that had lost 90% of its value over the last eight years, you'd rightly have concerns.

But action-camera industry leader GoPro (GPRO 1.44%) is a rare case because even after a substantial decline in its stock price since listing publicly in 2014, the company is successfully turning its business around. It reported its full-year 2021 earnings results on Feb. 3, revealing even more reasons to be excited about the future.

GoPro has a renewed focus on innovation, new revenue streams, and the backing of multiple Wall Street investment banks, which have upgraded GoPro stock and raised their price targets. Here's why.

Image source: Getty Images.

Innovating and expanding

GoPro used to have a one-dimensional business model, making action cameras, with little else in the pipeline. It's the primary reason investors turned negative on the stock shortly after hitting the market. But in the last three years, GoPro has introduced a software offering with its Quik video editing platform, as well as a lucrative subscription business for its loyal customers.

These new revenue streams have paved the way for GoPro to fund greater innovation in what it does best: make cameras. Its HERO10 Black action camera was released in September 2021, with market-leading video stabilization technology and the capability to shoot video in 5.3K high definition. That technology, dubbed HyperSmooth, is so good that it was honored with an Emmy award this month. The HERO10 Black is priced at just $499, and the company says its closest competitor is seven times more expensive at $3,500.

The recent success has prompted GoPro to announce an expansion of its camera line, from two product types to four, in an attempt to grow its total addressable market. It expects to take that even further in 2023, with more cameras and a brand new desktop software application that will help the company target new customers who don't own a GoPro camera.

But GoPro is also changing the way its products reach consumers. It used to rely solely on large retailers to sell its cameras, but in 2021, 34% of its sales were generated through its GoPro.com website. By cutting out the retail sales channel and selling direct-to-consumer, GoPro keeps a higher portion of the profits, which is important for growing its earnings per share.

The booming subscription business

Software and subscriptions are perhaps the most exciting pieces of GoPro's rejuvenated business. The company knew it had to find a way to earn revenue from customers who haven't purchased GoPro's hardware products, so it introduced Quik: a mobile-based camera application with built-in editing tools. It's designed to compete with the native camera on most smartphones, offering a more comprehensive set of features.

As of the close of 2021, Quik had amassed 221,000 subscribers. But with a price of just $9.99, it's not a major generator of revenue yet. The company's GoPro.com subscription package, however, is far more lucrative. For $49.99 per year, loyal customers can unlock exclusive product discounts, livestreaming capabilities, unlimited cloud storage, and damaged-product replacement. It has proven extremely popular and could generate over $78 million in revenue in 2022.

Data source: GoPro. Chart by author.

The largest benefit of GoPro's subscription business is the extremely high gross margin of between 70% and 80%. That means more of its revenue will flow through to the bottom line, compared to GoPro's overall business, which has a gross margin of about 41%.

The company's incoming desktop software offering will have its own subscription fee, creating yet another brand-new revenue stream.

Wall Street boosts its estimates for GoPro

When GoPro was listed on the public markets in 2014, it raced to an all-time-high stock price of $93.85 before steadily declining by 90% to $8.78, where it trades today. Naturally, Wall Street analysts held negative views through this period, but from November 2021, two major investment banks began to turn bullish.

Morgan Stanley analysts have upgraded GoPro stock to neutral from underweight, with an $11 price target representing 25% upside from here. But JPMorgan Chase analysts upgraded GoPro to overweight, with a more aggressive $15 price target -- so they think the stock could soar by 70%.

GoPro is incredibly cheap right now. Its 2021 earnings per share of $0.90 places its stock at a price to earnings multiple of just 10. That's a 70% discount to the technology-centric Nasdaq 100 index, which trades at a multiple of 33.6, implying GoPro stock would need to triple to align with the broader market.

Analysts expect GoPro's earnings to grow only marginally in 2022 compared to 2021, which is part of the reason for its discount to the market. However, there is plenty of scope for the company to exceed estimates, given the success of its subscription business and the expansion of its product line.

For investors willing to take a long-term view, this small-cap stock could supercharge your portfolio over the next few years.