GoPro (GPRO 1.15%) is one of the most exciting tech companies in the market today. It's gotten there not by developing a brand-new industry but rather by honing an existing one to fit a specific need. Ten years ago, the thought of seeing an action sports camera succeed, much less propel a company to more than a $6 billion market cap, would have seemed ludicrous. The camera business was in secular decline, as every new smartphone was being built with a camera that could take quality pictures whenever you needed it. By focusing on durable HD cameras that can be taken anywhere from the ski slopes to whitewater rapids, GoPro and its charismatic founder and CEO, Nick Woodman, developed a powerful brand in the adventure-sport marketplace. Where it goes from here should be even more exciting for investors.
Profits from hardware?
GoPro has achieved something that few nascent tech companies are able to achieve. It's been cash-flow positive for the past three years, topping out at $186 million on a trailing-12-month basis. It has no debt. And it sports a healthy cash position of $517 million on its balance sheet. The company continues to unveil new products, such as a drone camera and a device used to shoot 3D video that should continue to command premium prices for the near future. Many bears are concerned that eventually these devices will become commoditized and the beautiful margins that make this company such a compelling investment will erode.
Thinking about the second act for a long time
GoPro management has long understood that it can't remain purely a hardware company if it wants to continue to prosper and grow, and it's made a number of shrewd decisions throughout the years that should put the company on stable ground for years to come. A partnership with the NHL was tapped in January to show unique footage from GoPro cameras, a premium video channel was launched in March, and perhaps most exciting of all, a "Premium Content Licensing Portal" was unveiled in July.
This licensing portal allows for people to post video content for use in advertisements or other media. It's one of those truly great ideas that benefits all parties involved. For an adventurer who loves to surf, mountain bike, ski, skydive, or any other of myriad activities, it opens up a completely new way to make money. For someone shooting a commercial, filming a movie, or putting together a news report, it's much less costly and time consuming to use some of this admittedly gorgeous footage than to put together your own film crew. For GoPro, this feature could act as a firm differentiating factor for someone torn between purchasing a GoPro device versus one from a competitor.
Just the beginning
I love to invest in companies that have shown great vision and solid execution in their field but nevertheless have the potential to expand beyond it. Execution by GoPro management has been stellar. Returns on assets and equity, both measures of managerial efficiency, are strong, at 21.24% and 41.58% respectively. Operating margins have improved over the past few years, while SG&A expenses have been cut and a higher percentage of revenue has been poured into R&D.
Nevertheless, management is thinking about the future, how to protect these margins, and how to branch off into tangentially related business areas that should strengthen the whole company. This optionality is exciting but can lead to imperfect valuations.
We'll never be able to precisely value a company like GoPro, but don't confuse precision with accuracy. I think that five, 10, or 20 years from now, GoPro is going to be much larger, focused on more than just making cameras and producing much greater cash flows. Deciding whether it's worth "exactly" $40 or $20 or $80 right now is a fool's errand. As "capital-F" Fools, we must look at the bigger picture. What I see here is a dedicated founder and CEO, a company with an enormous market opportunity, and a willingness to not rest on the laurels of past achievement.
I'm not sure exactly what this company will look like in the years to come, but I'm excited to find out.