Every so often a company or business model comes along that revolutionizes the way that people behave. History is scattered with few truly disruptive business that can claim to have revolutionized society in this way. Henry Ford and his automobiles for the common man did this for transport. Likewise, Hewlett Packard, Intel and Microsoft were jointly responsible for ushering in the personal computer revolution. Apple’s success in transforming the music industry through it’s iPod’s and iTunes is well documented, and the Silicon Valley giant recently gone back to that heritage by purchasing Beats Music for $3 billion.
GoPro (GPRO) could well claim to be a revolutionary in the same mold as these companies, if not quite on the same scale. Their high quality, compact, relatively inexpensive and most importantly, almost indestructible range of cameras and video recorders have proved so useful that they’ve gone as high as the stratosphere and as deep as the depths of the ocean. At the same time, any person who is a thrill seeker or adventurer, or even just seeking to get some unique holiday snaps, can be found with a GoPro not far from their reach.
This functionality mixed with popularity was shown in the pre-IPO moves of the company, with the California based company selling close to 18 million shares at the higher end of the $21-$24 initial range which raised a figure in excess of $425 million.
The initial demand for the stock showed, with the first quoted price on the Nasdaq index $29.99, which was substantially higher than the bookbuild price, as was the first close at over $31. Since then GoPro (GPRO) has gone from strength to strength, briefly touching highs above $40 before settling at $35.76 on June 27, 2014.
With all the hype and excitement of the IPO now finished, it presents a good time for investors to have a look at the fundamentals of the company and determine whether bringing movie quality video recording to the masses will continue to underpin the GoPro stock price.
Understanding the Business
GoPro is at it’s simplest a consumer electronics retailer. The industry has largely been a bare area for stocks in the last few years with SkullCandy the last big pure play consumer stock IPO. Many companies that produce consumer electronics are in fact much broader based tech companies, like Apple and Google.
The centerpiece of the GoPro suite of products is the appropriately named Hero range of cameras and recorders. These form the foundation of the GoPro experience and have earned worldwide recognition for delivering top quality video even after being strapped to skydivers, deep sea divers and even astronauts and stunt plane pilots. This incredibly high quality offering allows the company to research and develop a range of accessories and complementary products around the central component.
These additional accessories range from customized tripods, handlebar attachments (for bikes), helmet camera attachments, shockproof casings and additional battery packs. The premium commanded by the Hero line of cameras extends to these accessories.
Metrics and Measures
In the absence of regulatory filings being such a newly listed company, there are a range of metrics and measures that we can use to analyze GoPro (GPRO).
The extent to which the camera is now part of every outdoors and activity based subculture is stunning. A simple search of the term GoPro in YouTube is testament to this, with literally millions of videos uploaded by tens of millions of users with that search term in the title. Social media, including Instagram, Twitter and Facebook also are testament to this with hashtags like #GoProOfTheDay popular across a long-range time scale.
However the company is secretive about sales figures and profitability, which will change once regulatory filings begin to flow. Despite this, estimates of the industry as a whole are in the $2 billion range, which grew by 21% by 2010. Since then the industry has grown, aided by better quality video and the increased tendency of users to share content online with friends and the public.
The company does disclose, however, that it has been profitable since 2002, and that in 2012 it sold 2.3 million cameras. Gross revenue in the same year was reportedly $521 million. Those kinds of sales figures would make industry veterans like Sony weep.
The Investment Case
The investment case is largely dictated by whether the company can maintain it’s “cool” factor among its devoted band of users. The company would argue that its users are loyal but strong competition can lead to brands being replaced relatively quickly, especially in the consumer tech space.
The ability of the company to innovate and further entrench users into the GoPro (GPRO) community is also critical to its success. For example, once someone has spent several hundred dollars on a Hero camera and a range of accessories, the switching cost to another brand becomes much higher.
Selling accessories like a flying pocket “drone” that can carry the Hero camera, trademarked editing software packages and Wi-Fi enabled cameras and other solutions go a long way to building this network effect.
The other major threat to GoPro is the established titans of the industry like Sony and Garmin, which are deep pocketed and also incredibly experienced. These are companies not used to losing with long histories of innovation that pose serious threats to the future viability and profitability of GoPro especially if discounting to capture market share outweighs the premium that consumers are prepared to pay for GoPro products.
GoPro is an exciting consumer technology company with an innovative and unique product offering on which it has built a range of add-ons and a profitable operating model. Clever marketing and brand loyalty has propelled the companies success to this point, but future returns will depend on the continued ability to stay ahead of the market and retain it’s cult status among users in the face of competition from established players in the industry.