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Shares of Consumer technology company GoPro (NASDAQ: GPRO) went public in June 2014 and touched a record of $90 per share in October that year. It is currently down 91% from record highs trading at $8.77 per share, valuing the company at a market cap of $1.35 billion.
GoPro stock has grossly underperformed the broader markets as its sales have fallen from $1.17 billion in 2017 to $891.9 million in 2020. But here’s why I think the stock is well poised to stage a comeback in the next 12-months.
GoPro has accelerated its turnaround
GoPro cameras are among the most popular in the world. But the company targets a niche segment and its products do not warrant repeat purchases compared to smartphones or even wearables. This impacted sales growth over the years, But now GoPro is successfully expanding its suite of products and has turned its focus on the high-margin software business.
The company’s Quik is a camera application for smartphones that aims to replace the camera on your device. This application comes with multiple features that include premium filters and themes, a tool for slow, fast as well as freeze motion, royalty-free music options and a content organizing tool. The Quik application is priced at $1.99 a month or $9.99 a year. GoPro Premium users who pay $69.99 each year for cloud storage can get access to this app for free.
At the end of 2020, GoPro’s paying subscriber base rose by 145% year over year to 761,000. GoPro expects to generate $50 million in annual recurring revenue for every one million subscribers.
But the company’s main driver is its portfolio of action camera products. Over the years, GoPro has adjusted its sales mix which has improved profit margins. It has leveraged e-commerce to sell directly to consumers and online sales accounted for 31.7% of total sales in 2020, compared to just 8.8% in 2018. This has allowed the company to increase its gross margins from 31.5% to 35.3% in this period.
What next for GPRO stock?
GoPro’s accelerated shift towards a direct to consumer sales strategy and the rapid expansion of its subscription business allowed it to increase sales by 86% year over year in Q2 of 2021 to $250 million. Its adjusted gross margin rose by 850 basis points to 40.1%. The company’s strong top-line growth positive impacted profitability as well as it reported an adjusted earnings per share of $0.12 compared to a loss of $0.20 in the year-ago period.
GoPro has also managed to increase customer spending as the average selling price for its products in Q2 rose 15% year over year to $345. It sold 820,000 devices in the quarter, which was 10% higher than Q2 of 2020. The cameras priced over $300 accounted for 94% of total product sales.
As seen above, GPRO’s subscription business is also gaining significant traction. The total number of subscribers for its Quik video app, mobile app and cloud storage services more than tripled in the last year to 1.16 million generating $11.6 million in sales, compared to just $4.7 million in the same period last year.
Subscription sales account for less than 5% of total revenue but GoPro expects subscriber count to touch 1.7 million by the end of the year which will bring in $90 million in annual subscription sales with margins between 70% and 80%.
The final takeaway
GoPro is forecast to increase sales by 28.7% year over year to $1.15 billion in 2021 and by 7.8% to $1.24 billion in 2022. Analysts also expect earnings per share to improve from $0.08 in 2020 to $0.87 in 2022.
This shows GPRO stock is valued at a forward price to sales multiple of just 1.1x and a price to earnings ratio of 10.1x which is quite reasonable given its growth estimates. Wall Street expects GoPro stock to rise by 25% in the next 12-months.
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