Wearable technology has been confounding for industry followers. After being billed as the next big thing in technology, adoption has been rather lackluster overall. Of course, we're still in the initial phases of wearable tech. For perspective, Apple unveiled its smartwatch line this week, but it seems the overall industry hasn't lived up to its promise -- yet.
Whether it's the smart-shirt partnership between Ralph Lauren and tech firm Omsignal, Google's hyped Google Glass venture, or the smartwatches currently on the market, it seems the wearable-technology field is mostly a niche market with limited appeal. But that's how all technology begins, doesn't it? At some point, the masses questioned the broad appeal of the personal computer, the Internet, and smartphones.
As far as wearable tech goes, one of the more successful devices has been the wearable camcorder. And although the company is still expensive relative to other technology firms, GoPro (NASDAQ:GPRO) is the most expensive stock in wearable tech worth buying.
An unforced error
My observations led me to find GoPro to be too richly valued for a consumer electronics company with one product line. A pre-IPO decision to play up its social-media ambitions, which the company derived no meaningful revenue from, set the company up for poor post-IPO performance after its IPO-based euphoria wore off.
For perspective, the company was valued at $3 billion during its IPO and finished the first day of trading valued at $4 billion; within a week shares were up 100% and the company achieved a market cap in excess of $11 billion before falling to its current value of $5 billion. Overall, the company is up 66% from its IPO price, but many investors are discouraged after buying the investment at higher price levels. I think the company would be better off downplaying its social-media ambitions until it has a monetization plan in place.
Other concerns abound, but the valuation is better
After nearly a year of watching from the sidelines, I recently took a position in GoPro. Although I admit the stock is still expensive by the static price-to-earnings valuation, coming in at roughly 41 times trailing-12-month earnings, I think there are some nuances that give the stock value.
First, analysts are estimating earnings growth to be in the line of 26.3% annually for the next five years. The PEG ratio, the P/E ratio incorporating growth, is still a little high, but it's accomplishable as the company is aided by a small earnings base and should be able to increase its economies of scale on an EBITDA basis. Over the past two fiscal years, the company has grown revenue by an annualized rate of 63% while its cost of revenue has increased by 60%, leading to an annualized EBITDA gain of 66%.
However, stock based compensation jumped 180% per year as the company went public during that period. I expect stock-based compensation to slow going forward, becoming less of a drag on earnings.
GoPro's less sexy ... and I like that
More broadly, it seems as if Wall Street has taken its focus off GoPro for the time being. After months of cheerleading, including comparisons to Steve Jobs and Nike, Wall Street seems less enamored with the GoPro story. I think less Wall Street bullishness is good for the young company after incessant Wall Street bullishness bid the company to stratospheric levels. Meanwhile, shorts continue to pile in, making the bearish trade quite crowded as concerns about new entrant Xiaomi gave more ammunition to their cause.
In the end, however, GoPro continues to execute well, and I like buying high-quality companies at a discount. GoPro may be "expensive" in the traditional sense, but the company is currently performing well at valuations of half off its all-time highs. In the end, I expect competition to be less of an issue than most expect, as GoPro's brand cachet is high. Additionally, shorts will eventually have to buy back those shares, as I think the company is oversold. As such, I believe the stock is the most expensive stock in wearable tech worth owning.