In the face of elevated inflation and rising interest rates, consumers have been forced to manage their money more carefully lately. It has led to a struggling retail sector, which is experiencing an inventory glut and falling prices almost across the board.
As a result, the S&P 500 Retail Select Industry Index -- a measure of retail sector performance -- has declined by 9% over the past year. By comparison, the benchmark S&P 500 index is up 13% over the same period.
That has been bad news for GoPro (GPRO 1.17%) because its action cameras are a discretionary product. Those tend to be the first things consumers slash from their budgets during tough times.
But the company has focused on making positive changes to its business to weather the challenging economic climate, and they could bear significant fruit during the upcoming holiday season. Here's why investors might want to buy GoPro stock now.
GoPro is back to its pre-pandemic playbook
Before diving into some significant changes GoPro is making, it's important to acknowledge this company has been struggling to generate consistent growth for a while. Its stock traded at an all-time high of $93.85 shortly after it came public in 2014, but it has since declined by 96% to just $3.43. Demand can be lumpy for niche products like action cameras even though GoPro is the industry leader.
But the company is making substantial progress. It has always relied on selling its products through large retailers, but during the pandemic, it had enormous success selling directly to consumers through its website, GoPro.com. But now that malls and retail shopping are back in full swing, GoPro is aggressively expanding its footprint.
It aimed to place its products in 2,000 new store locations around the world in 2023, but it has already surpassed 2,500. That's great news ahead of the busiest shopping period of the year. In 2024, it will go a step further by adding another 3,000 locations, which should bring the company's total to 25,000.
But GoPro has made another dramatic change in recent years, which is to focus on building subscription-based revenue streams. They come with higher gross profit margins than hardware products, and they generate predictable, recurring revenue, offsetting some of the lumpiness experienced by product sales.
Its flagship GoPro.com subscription gives customers exclusive product discounts, unlimited cloud storage for videos, and access to premium content editing tools through the Quik smartphone app, all for $49.99 per year. The company had 2.5 million subscribers at the end of the third quarter (ended Sept. 30), which was a 20% increase year over year.
Revenue fell in Q3, but that isn't the whole story
GoPro generated $294 million in revenue during the third quarter. At face value, that was a drop of 4% compared to the year-ago period. But beneath the surface, the company's retail channel actually delivered revenue growth of 12%, and it now accounts for 78% of total revenue. The overall decrease was driven by a steep decline in online sales on GoPro.com as the company turned its focus back to physical stores.
Subscription revenue also jumped 16% year over year to a quarterly all-time high of $24.8 million. This will likely be a key part of GoPro's business going forward, because it plans to release a new desktop version of its Quik content editing application for Windows next year. As part of the launch, the company will also offer a new subscription tier called Premium+, which will be priced at $99.99.
GoPro is on track to generate $100 million in recurring subscription revenue next year, and given it can carry a gross profit margin of as high as 80%, it will go a long way toward supplementing the company's bottom line.
Speaking of which, GoPro generated a net loss of $3.6 million during Q3, but after stripping out non-cash expenses like stock-based compensation, it actually delivered a non-GAAP profit of $6.7 million. That was a massive improvement over the first and second quarters of 2023, when the company lost a combined $38.9 million by the very same metric.
Image source: Getty Images.
Why GoPro stock is a buy ahead of the holidays
GoPro has been reducing the price of its products back to pre-pandemic levels, before it was hit with supply chain issues. The average selling price of its cameras fell 17% to $317 during Q3, and while that sounds like bad news, it should help bolster sales ahead of one of the busiest times of the year for retail.
Plus, the company launched its brand-new HERO 12 Black camera in September, which is packed with new features for content creators of all skill levels. Despite its premium pricing of $399, management said early sales in Q3 had exceeded expectations. It could prove to be a hot product for action sports enthusiasts heading into the holidays.
GoPro has forecast revenue of $325 million for the final quarter of 2023. If it hits the mark, it will represent a modest increase from the year-ago period, returning the company to growth.
It will also take GoPro's 2023 full-year revenue to a shade over $1 billion, and given the company is valued at just $521 million as of this writing, its stock is trading at a rock-bottom price-to-sales (P/S) ratio of just 0.5. It's near the cheapest valuation in the company's history even despite the recent slate of positive developments.
GoPro could prove to be a great buy at the current price not just for the upcoming holiday period, but also into next year and beyond.
