Tuesday, December 01, 2015

Why GoPro Inc (GPRO) Stock Is a Rally Play for 2016

GoPro's Q3 earnings hiccup and Hero5 delay

Investors in action sports camera maker GoPro Inc (GPRO) have watched in horror as shares of GPRO stock have tumbled nearly 74% over the past year. Now, reports that the much-anticipated Hero5 camera won’t be available in time for this year’s holiday season make a swift GoPro stock recovery even less likely.

There’s no denying that GPRO makes a solid action sports video camera, but positive investor sentiment around GoPro stock has all but disappeared.

Among things holding down GoPro: GPRO shares were crushed following an abysmal third-quarter earnings report. The company failed to meet analyst expectations for both revenue and earnings, citing lower-than-expected sales of its Hero4 Session camera. Management took some responsibility, admitting the camera “was initially priced too high, leading to a price cut, and didn’t have a big enough marketing budget.”

Following the earnings release, GoPro CEO Nick Woodman told CNBC, “If Session had been stronger out of the gates, if we hadn’t mispriced it, and if we had backed it up with the marketing it deserved, I think we would have had a very different earnings call yesterday.”

Still, there at least was hope that GPRO stock might be able to turn things around with a strong 2015 holiday shopping season — but those hopes were in part based on the idea that a Hero5 would be popping up before the close of 2015.

And yet … GoPro might not be completely doomed, and in fact, might be worth picking up on the cheap right now.

Is GPRO Stock Still Worth It?


The panic selling that followed last month’s third-quarter earnings report and sent shares of GPRO stock below the company’s $25 IPO price to an all-time low of $18.75 seems to have slowed, and the past few trading days actually have GPRO stock up a few points.

While this, by no means, is an indication of a turnaround, it does suggest that the initial fear and shock of the poor third-quarter report has abated. Moreover, Wall Street didn’t react very negatively to the Hero5 reports, with shares barely budging Monday.

Perhaps that’s because the market still sees plenty of potential in the Hero5.

When this camera finally is released in 2016, expect droves of sports enthusiasts to snatch them up. Considering that the current flagship model, the Hero4, was released in September 2014, the wearable camera market (particularly the action sports video segment) is due for an upgrade, and the Hero5 is expected to deliver a plethora of impressive advancements.

Also encouraging: Management has committed to buying back $300 million worth of GPRO stock next year, and R&D advancements in the company’s virtual reality endeavors make GoPro a strong player in an otherwise minuscule arena.

In addition to the virtual reality rig — which has a price tag of $15,000 and requires 16 Hero4 cameras — GPRO sells a variety of sports-related recording equipment, including specialized mounts and harnesses, as well as live broadcasting accessories.

Plus, GoPro as a stock is starting to look too attractive fundamentally to ignore.

At current levels, GoPro stock is trading at just 17 times trailing earnings and 15 times next year’s projected profits. That latter number not only is a discount to the S&P 500 — which is trading at more than 17 times earnings expectations — but also looks attractive to other tech companies such as Fitbit (FIT), which sports a forward P/E of 26. That’s a pretty decent difference considering GPRO earnings are expected to grow 9% next year, and Fitbit’s improvement is expected to be only slightly better, at 11% profit growth.

All told, you’re paying 15x for expected five-year earnings growth of 23%. Not bad at all.

And unlike many tech companies that are sitting on oodles of debt and are cash-poor, GoPro sits on solid financial footing, with more than $500 million in cash offsetting exactly zero debt.

Bottom Line for GoPro Stock


Yes, GoPro management erred with respect to the release and marketing of the Hero4, and now it looks like the Hero5’s launch will have a few flaws of its own. But GPRO isn’t simply a one-trick pony. Advancements in other video related sectors such as virtual reality, combined with the action sports camera industry’s burning desire for the next upgrade, means GoPro still will be able to kick around 2016.

And when you consider the discount GoPro stock is trading at thanks to its massive drubbing … GPRO at least looks good enough for a speculative position.

Article originally appeared on InvestorPlace (12/01/2015)