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Better Buy: Alphabet Inc vs. GoPro Inc

By Brian Stoffel - May 12, 2016 at 12:00PM

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The winner here is easy to see.

GoPro (GPRO -1.25%) and Alphabet (GOOG -2.57%) (GOOGL -2.45%) -- better known as "Google" -- really couldn't be any different.

One company (GoPro) essentially has one popular product, is seeing its revenue dry up, and has experienced a precipitous drop in its stock. The other (Alphabet) has seven services with over 1 billion users, has grown at impressive rates for such a large company, and is almost a 14-bagger since going public in 2004.

Does that necessarily mean that Alphabet is a better buy at today's prices than GoPro? Let's look at that question through three different lenses.

Financial fortitude

Cash is king. When business is humming along and management is realizing great returns on its investments, it can be easy to lose sight of this. But in times of crisis -- and those times will always be around the corner -- nothing makes a company more fragile than not having enough cash on hand, and too much debt to pay off.

While the financially strapped company has to shrink in order to survive in a depression, the company sitting on a cash hoard actually benefits from a downturn: It can buy back shares, outspend its rivals, or even acquire them.

Here's how these two companies stack up in terms of their financial fortitude:

Company

Cash

Debt

Net Income

FCF

Alphabet

$72 B

$7.7 B

$16.5 B

$17.6 B

GoPro

$474 M

$0

($88.1 M)

$3.8 M

FCF = free cash flow. Data sources: Yahoo! Finance, SEC filings.

It's important to keep things in perspective, here: Alphabet is worth over 370 times more than GoPro. That makes GoPro's numbers not seem so bad -- especially when you consider that the company sports absolutely no long-term debt.

That being said, I'm giving the nod here to Alphabet. GoPro's lack of profitability -- and razor-thin positive FCF -- is concerning. A year ago, both of these metrics were very strong for GoPro. That's not the case anymore, and the downfall has been swift.

Alphabet, on the other hand, is rock-solid, with a cash stash that can only be rivaled by a certain company based in Cupertino, Calif.

Winner = Alphabet.

Valuation

Here's one metric on which GoPro actually looks very attractive. Because the company has seen its business evaporate in the wake of a less-than-stellar Session camera -- and a delay of the release of the company's Karma quad-copter -- extremely low expectations are baked into the stock price.

Company

P/E

P/S

P/FCF

PEG Ratio

Alphabet

24

6.5

29

1.30

GoPro

N/A

0.8

357

0.26

Calculated using price of Google C Shares. Non-GAAP EPS used in P/E calculation. Data sources: Yahoo! Finance, SEC filings, E*Trade.

While Alphabet's shares are relatively attractive on a historical basis, GoPro has never been this cheap. Of course, that's because its future has never seemed so much in peril. However, I actually believe the company's decision to delay Karma in order to get it right -- and the decision to wait until the holiday season to release the newest HERO iteration -- are excellent decisions in the long run.

There's no time of year more important for GoPro than the holiday season, and if the company has a winner in the HERO 5, I think there's a great chance that shares more than recover from the levels they stand at today.

Valuation = GoPro.

Sustainable competitive advantages

It's here where GoPro absolutely wilts. The company may have been the first-mover in sports/action cameras, and it may have built a valuable brand in its time as the only kid on the block. But with that success comes competition. While I think management is wisely trying to create an ecosystem that can lock customers in, that's still a work in progress.

Alphabet, on the other hand, has a miles-wide moat. No other company in the world is more synonymous with search. Sans a certain social media giant, no other company has collected anywhere near as much data on users -- data that can then be used to offer up ad placement that would have been thought unimaginable just 20 years ago.

Winner = Alphabet.

In the end, I actually own shares of both of these companies. But while Alphabet makes up almost 12% of my family's real-life holdings, GoPro makes up just 1% -- since it's a much riskier stock to own.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,179.26 (-2.45%) $-54.77
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,187.45 (-2.57%) $-57.68
GoPro, Inc. Stock Quote
GoPro, Inc.
GPRO
$5.53 (-1.25%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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