The stock market is home to the most innovative companies in the world, but it also hosts some of the most embattled corporate stories in history. It's not often those companies turn around to make a comeback, but that's certainly the move action camera company GoPro (GPRO 5.92%) appears to have pulled off.
Several market pundits developed concerns in the years following GoPro's 2014 IPO as the company struggled to evolve beyond its one-dimensional camera hardware business, and its stock has fallen 93% from its all-time high as a result. But not only did the company survive its challenges, it's growing again and is now consistently profitable.
GoPro just reported its financial results for the second quarter of 2022, and despite tough economic conditions, the company made further positive strides. Here's why investors should consider buying GoPro stock now.
Image source: Getty Images.
GoPro has added new revenue streams
Manufacturing hardware of any kind is often cost-intensive, so profit margins are typically quite low. Making and selling cameras still accounts for over 90% of GoPro's revenue, and the company's overall gross profit margin came in at 38% in the second quarter of 2022.
But loyal customers now have the opportunity to subscribe to the GoPro.com website for exclusive product discounts, unlimited cloud storage for their videos, and the ability to live stream directly from their GoPro camera -- to name just a few of a growing list of benefits. The price of this subscription is $49.99 per year and over 1.9 million customers have signed up, marking a 65% growth rate since the second quarter of 2021.
By the end of 2022, GoPro expects its subscriber base to top 2.2 million, which could generate $100 million in annual recurring revenue, but the best part is that the subscription business comes with a gross profit margin as high as 80%, so much of the revenue could flow to the company's bottom line.
GoPro also sells a $9.99 per-year subscription to its Quik camera application, which is designed to replace the native camera software on the user's smartphone. In addition, the company is set to release a new desktop-based editing software in 2023 which will add yet another high-margin revenue stream.
GoPro is reworking its sales mix
GoPro has historically relied on large retail chains to sell its cameras and accessories. This sales channel is incredibly reliable, but it means GoPro has to sacrifice a portion of its profits to each retailer and it also means the company has a less direct relationship with its customers.
GoPro is attempting to make more of its sales through a direct-to-consumer channel using its website, and in the second quarter, that accounted for 38% of revenue. Every unit sold this way has a higher profit margin, and it also gives the company a direct line of communication with each customer to inform them of new products and provide a more personal level of service to keep them coming back.
The latter point will be highly valuable as GoPro continues to expand its hardware line to include products for new use-cases, so it will benefit from keeping customers informed. For example, in April the company launched its HERO10 Black Bones edition, which is specifically designed to be mounted on drones for aerial videography.
GoPro stock is a great value
GoPro acknowledges that the remainder of 2022 will be challenging with higher inflation and rising interest rates hurting consumers' spending power. That's why the company revised its sales estimates down slightly for the full year, from 3.2 million product units to 3.1 million units.
It also expects to keep taking a hit from the strong U.S. dollar, as unfavorable currency exchange rates impact the revenue it earns in foreign countries -- its second-quarter revenue of $251 million would've been $8 million higher if not for this external hurdle.
Nonetheless, GoPro has generated $0.92 in non-GAAP earnings per share over the last four quarters, which places its stock at a price-to-earnings multiple of just 7.1. That's a 73% discount to the Nasdaq-100 technology index, which trades at a multiple of 26.8, implying GoPro stock would have to more than triple to trade in line with the broader market.
As long as GoPro remains profitable throughout this difficult economic period, upside in its stock should remain on the table from here. Then, as it progressively releases new products and high-margin subscriptions from now into 2023, it might find a growth resurgence that could drive major gains in its stock price over the longer term.
