GoPro Inc.'s (NASDAQ:GPRO) rugged cameras have proved they can take a beating. But now, the newly IPO'd company is fending off an entirely different kind of assault.
After more than doubling from its IPO price at $24 per share just four trading days ago, profit-takers and short sellers finally descended on GoPro stock Wednesday. When all was said and done, shares of GoPro had fallen nearly 14%. But don't feel too bad for GoPro shareholders who stuck around; As of this writing, GoPro stock is still trading at a 34% premium to its first-day close.
Where will GoPro head from here? Over the near term, I don't know. But given GoPro's massive post-IPO volatility, nobody really knows -- and that's part of the reason I prefer to avoid playing most IPOs until the dust settles.
We can, however, dig in to get a better idea of GoPro's long-term ambitions.
At first glance, GoPro does look richly valued. With its market cap of $5.2 billion, GoPro shares currently trade for around 6.2 and 86 times trailing 12-month sales and net income, respectively.
By contrast, Nikon's (NASDAQOTH:NINOY) $6.2 billion market cap means it trades at a paltry 0.65 times trailing-12-month sales, and just 13.6 times last year's earnings. Even then, keep in mind Nikon also has its hand in multiple sectors like high-end imaging equipment, sport optics, microscopes, and precision lithography systems -- but so far nothing anyone considers to be real threat to GoPro's business.
Or consider Garmin (NASDAQ:GRMN), which sells for a closer 4.4 times sales, but has a much more manageable trailing P/E around 19. Garmin last year introduced its VIRB-series cameras in an effort to diversify away from its own sluggish core GPS businesses and compete with GoPro's fast-growing Hero products. Even so, that didn't prevent GoPro's revenue from growing 87% for all of 2013.
But therein lies the rub: GoPro collects essentially all its revenue from the sale of those ruggedized cameras and related accessories. And while growth was stellar in the past, its first-quarter 2014 revenue curiously fell 7% from the same year-ago period. Some investors claim that's because GoPro hasn't had any significant new camera releases of late, but they should be asking themselves: Why else should GoPro deserve to trade at such a lofty valuation to its industry peers?
On opportunities, risks
For one, GoPro has done an excellent job securing a large chunk of its core market over the past 10 years, most recently commanding a 45% share of U.S. camcorder sales in 2013. But given that first quarter year-over-year decline, investors should keep their eyes peeled for market share erosion as other industry players like Garmin or Nikon inevitably try to replicate its success.
What's more, camcorders comprise a device class that simply doesn't boast the same broad appeal as other gadgets with wider operating scopes like smartphones. And unless GoPro has undisclosed plans to introduce an entirely new class of hardware products, it will find a ceiling.
This in mind, it seems reasonable to assume GoPro should be able translate at least some of its success to international markets, to which the company referred in its IPO filings as "a significant growth opportunity for us." At the same time, note revenue from outside the U.S. already comprised 53% of GoPro's total last quarter -- which means more than $522 million in sales already -- up from 35% in 2011. GoPro expects that percentage to go higher from here, but it's certainly not starting from scratch.
Next, despite currently deriving no meaningful revenue outside of its hardware devices, GoPro reclassified itself as a "media company" leading up to its IPO. Part of that move was arguably to command its higher valuation, but GoPro insists it will pursue opportunities to monetize the media sharing and creation aspects of its business going forward. I've already written, however, that I think GoPro's efforts to do so seem underwhelming right now, and aren't expected to contribute meaningfully to its overall results in the near future.
For at least the next few quarters, then, it appears investors need to rely solely on the performance of GoPro's hardware business to justify its lofty valuation. For now, given GoPro's current lack of diversification and lull in growth, I'm perfectly content watching this one from the sidelines.