Founded in 2002, GoPro (NASDAQ: GPRO) is the pioneer in active lifestyle cameras, practically inventing the market segment (GoPro). While their brand may be a household name, GoPro is struggling: ever since its 2014 IPO, the company has seen very-little to zero growth. Since its 2014 peak of $86.97, the stock has dropped by 87.6% to $10.83 as of publication.
While certain investors may see GoPro as a relic of the past, others are betting on GoPro's Founder and CEO, Nick Woodman, to turn the company around. This begs the question...
How Can GoPro Make a comeback?
Answering this question requires a two-part analysis:
The Current State of GoPro
How GoPro Can Grow
As always, none of what you read here is financial advice. I am not a financial advisor and do not have $GPRO stock. With that out of the way, let us dive into the current state of GoPro.
The Current State of GoPro
Founded by Nick Woodman in 2002 after a surfing trip in Australia, GoPro pioneered the active camera industry. Targeting the outdoors and the extreme-sports community, GoPro has made a name for itself by offering high-quality yet little, impact-resistant cameras that can be attached on the body, on helmets, or just-about anywhere else.
GoPro's bread and butter remains its active lifestyle cameras. The cameras are now powerful and indestructible, and are capable of 360 degree video, 5K resolution, 20MP photos, slow-motion and more (GoPro). Beyond their traditional cameras however, the company also sells a 360 degree camera, the GoPro Max, as well as a digital subscription, a mobile app, camera accessories and apparel.
GoPro also offers its very own subscription. The subscription, which costs $49.99/yr, offers unlimited cloud storage, access to their video editing app Quik, livestream capabilities, free "no-questions-asked" camera replacement and discounts on all accessories and products (GoPro).
Industry & Landscape
GoPro is undeniably the market-leader within the active lifestyle camera industry. However, that industry it not very large. The global digital camera market was valued at only $13.1B in 2020, a small fraction of which is the active-lifestyle camera industry (iMarc). While GoPro's total addressable market (TAM) is rather difficult to calculate, it's a fair assumption to make that the company's TAM is small.
Within the digital camera market as a whole, GoPro's competitors include Nikon, Sony, and Canon. However, the real competition comes from the cell-phone manufacturers such as Apple, Samsung and Google, which have squeezed GoPro's TAM and made have rendered GoPro's cameras obsolete for the masses (more on that later).
Beyond hardware, GoPro only offers some software products such as its video-editing software Quik. Again, the size of the video-editing software market is difficult to estimate, and GoPro is a tiny-player in the market. Market-leading video-editing software include Adobe (Premiere), Apple (iMovie), Sony Vegas, and a whole lot more.
Nick Woodman founded GoPro and has served as the CEO of GoPro for 16 years. He holds 19% of the shares outstanding but has 69% of voting rights (CCM). Total institutional ownership represents 48% of outstanding shares, Vanguard and BlackRock hold 7% and 5%, respectively (CCM). While institutional ownership may appear low, I expect institutional ownership to increase if GoPro gives signs of a promising turnaround effort. GoPro currently faces a 9.67% short percentage of shares outstanding as of March 31st, 2021 (Yahoo Finance).
Let's dive into the numbers (if you aren't a big numbers person, I suggest you skip to the "Why GoPro Has Struggled to Grow" section). GoPro has $326M in cash with debt of $280M, some of which stems from leases, however, most of the debt comes from convertibles (CCRM). The convertible debt has a $10 strike price, meaning that there is likely to be 10-15% stock dilution. The company's net cash position is of $46M, which is by no means a crazy cash position, but I would consider it to be a solid cash position given the GoPro's recent troubles.
In addition to this, days holding inventory spiked in the first half of 2020 as the company was negatively impacted by COVID, however, total inventory and days holding inventory have both significantly dropped in the second half of 2020 (CCRM). This comes as a result of GoPro's shift away from traditional retailers and the D2C space (more on that later).
Overall, the balance sheet is reasonable and does not have any particularly alarming component. With this in mind, let us turn to valuation & earnings
Valuation & Earnings
GoPro's market cap is of 1.74B with a price-to-sales (P/S) ratio of 1.928, which is more than double its digital-camera competitors' (Sony, Canon and Nikon) average of 0.885 (YCharts). GoPro's 12-month trailing P/E ratio is undefined. This is explained by the fact that the pandemic seriously affected GoPro, since retail stores were closed and individuals could not go outside and use their GoPro. GoPro's quarterly P/E ratio calculated from Q4 2020 data is 27.6 (MacroTrends). The company's digital-camera competitors have trailing P/E ratios of 32.83 for Canon, 38.69 for Nikonand 14.02 for Sony. Although not perfect competitors, the comparison is still worth noting as GoPro seems to be in-line with its competitors (at least when using GoPro's quarterly P/E ratio).
In addition, GoPro's Price/Book ratio (mrq) is of 7.98, which is far higher than its digital-camera competitors' average of 1.52 (Yahoo Finance). This suggests that the company may be over-valued compared to its digital-camera competitors.
Overall, the valuation of the company seems to lean slightly on the over-valued side, but maintains a hold consensus. Combined with a healthy balance sheet, these factors suggest that investors understand GoPro's business well and that investors are not categorically against the potential for GoPro to grow. If investors did not believe GoPro had any possibility to grow, they'd have jumped ship. While the path to growth may not yet be clear, the potential remains.
Why GoPro has Struggled to Grow
GoPro has been struggling to grow for a number of years now. For one, the nature of the product doesn't allow for much "natural" growth. That is, once a consumer has purchased a GoPro, there is very little incentive for them to upgrade to a newer model unless the customer is keen on having the latest resolution or slow-motion technology. For the average user, having one GoPro is enough to last a number of years. Until phones and laptops adopt the latest resolution (which always takes a considerable amount of time), the average consumer will not feel the need to upgrade to the latest GoPro camera.
In addition to this, GoPro has also been made irrelevant by the incredible advancement in cell-phone camera technology. Unless you require a camera that can withstand shock, a cell-phone camera is a perfectly acceptable replacement for a GoPro. The evolution of cell-phone camera quality has pushed GoPro to have to focus purely on its niche of active lifestyle cameras rather than expand into more general, every-day film cameras. This forced focus has tremendously limited growth at GoPro since they cannot leverage their know-how in any aspect other than by continuing to develop increasingly better iterations of the same product.
However, that isn't to say that GoPro didn't try to expand beyond their traditional camera. Over the years, GoPro has attempted to launch a media division, a drone and a VR-camera, all of which failed (Sun, 2018). To this day (for better or worse) GoPro remains largely focused around their hardware.
How GoPro Can Grow
As it stands, GoPro does not have many competitive advantages. While this may be worrying for its growth potential, the few competitive advantages that the companies does have are strong and need to be maintained. The first competitive advantage GoPro enjoys is its niche expertise.
GoPro practically invented the active lifestyle camera and created the market for it. The company was the first to offer such a product and has dominated the niche market ever since. By continually being in the market — and hardly nowhere else, the company has built-up a large array of knowledge relating to its niche. From IP to marketing techniques, GoPro's niche expertise has enabled it to cement its position within the market and keep competitors at bay.
Beyond niche expertise however, we also find that GoPro enjoys tremendous brand recognition.
Over the years, GoPro has been able to build a reputation for its brand as the go-to for small, high-quality yet indestructible camera. By leveraging user-generated content (UGC), GoPro has been able to solicit and repurpose content showing real people using its products. This marketing strategy combined authenticity, visualization and peer-to-peer recommendation all in one, creating tremendous brand recognition from backcountry skiers to new parents.
The GoPro universe is also vast: GoPro has over 10M subscribers on Youtube, nearly 18M followers on Instagram and 10M likes on Facebook, putting it at a total of over 38M followers across social media. However, some of the hype has faded: GoPro's most recent Youtube uploads only average about 70K views compared to its older videos. GoPro's 10 most popular videos are all at least 3 years old.
Nonetheless, GoPro enjoys and maintains tremendous brand recognition within the market.
Future Growth Opportunities
Doubling-down on D2C:
GoPro can grow by continuing to develop its direct-to-consumer (D2C) store, gopro.com. Going direct-to-consumer would be beneficial to the company for a number of reasons. For one, going D2C would enable GoPro to control their inventory and reduce their average days holding inventory. In addition, going D2C would make the company leaner, which combined with lower inventory and average days holding inventory, may drive the GoPro stock price up.
Going D2C also enables the company to take control of its margins. When GoPro releases a new product, retailers (Best Buy, Walmart, Target, etc.) will discount the previous models in hopes of getting rid of the inventory, squeezing GoPro's margins. By going D2C, GoPro takes control of the distribution and can work to ensure that they sell nearly-all of the previous models prior to releasing a new one — keeping margins steady.
Lastly, going direct-to-consumer also gives GoPro full control of the purchase experience. Crucially, being in control of the purchase experience enables it to create a number of upsell opportunities for the GoPro subscription or other camera accessories. So long as GoPro receives a majority of sales from the traditional retail distribution system, it will never be able to fully leverage the power of upsell opportunities.
One of the ways GoPro has been engineering the shift to direct-to-consumer is by promoting their e-commerce site. According to SimilarWeb, 1.96% of visits to gopro.com came from advertising and 5.98% of visits came from paid search, for a total of 7.62% of visits coming from pay-per-click (PPC). For comparison, Canon has 1.09% of visits coming from advertising and 3.35% coming from paid search, for a total of 4.42% of visits coming from PPC. GoPro is clearly spending a lot more money to promote their website across the internet.
While GoPro has started to pivot to a D2C business model, I'd like to see a more aggressive stance on shifting to a direct-to-consumer model. In my opinion, GoPro needs to go back to its roots: viral UGC marketing. I'd like to see a GoPro marketing campaign focused on the achievements/incredible moments of everyday people, not just elite athletes. Having an "average Joe" UGC marketing campaign go viral may remind individuals of GoPro, driving sales to their website outside of their niche market.
That being said, I do not think that doubling-down on D2C can be their main source of growth. I personally consider the shift to D2C to be more about becoming a lean company rather than driving real growth. For real growth, GoPro needs to build an ecosystem.
Building an Ecosystem
The biggest issue facing GoPro is the small and limited customer lifetime value (CLV). As previously mentioned, GoPro has limited natural growth — a customer is unlikely to buy a new GoPro for quite some time, limiting the average CLV. Hardware isn't driving profitability or growth. If GoPro wants to grow, it needs to focus on high-margin, recurring revenue, i.e., GoPro needs to pivot to a subscription business. How could it do this?
By building an ecosystem.
GoPro has the exact opposite problem that Netflix and Disney have: it has the hardware but does not have the software. That is, GoPro has an ecosystem of hardware products but has done little to connect them all together.
Their most recent product launch, Quik, along with the GoPro subscription plan, seems to be a step in the right direction. However, I believe that GoPro needs to do a lot more than offer basic editing tools.
As mentioned before, the editing software market is extremely crowded and saturated with a number of players. Adobe Premiere, iMovie and Sony Vegas are just a couple of the hundreds of movie-editing software packages that exist. While I think that creating an editing system is a nice thing-to-have, I do not think that Quik is the solution to GoPro's growth.
Rather, the GoPro subscription needs to focus on integration. Without having interviewed GoPro users myself, I hypothesize that the majority of GoPro users are looking for an easy way to share their clips. As such, I believe that the main appeal of the subscription service should be frictionless integration with cloud infrastructure, computers, editing software and social media. Taking inspiration from Apple, I think GoPro can build subscription service offering unlimited cloud storage, automatic backups, easy-upload to social media, the Quik video-editing tool and seamless integration into the top video-editing softwares. For GoPro to grow, it needs to push out software on the existing network of hardware.
It is only by focusing on increasing the customer lifetime value with high-margin, recurring sources of revenue that GoPro is going to grow. Hardware isn't driving profitability or growth. It's time for GoPro to pivot to become a software-first camera company rather than hardware-first camera company. Only then can GoPro recover.