They Aren’t Just A Hardware Company And May Have The Best Business Model Ever
Yesterday GoPro (GPRO), the maker of hands free, waterproof cameras for the active, went public. Shares were priced at the very top of the initial $21-24 range and, as the huge level of demand would indicate, immediately traded at a significant premium during yesterday’s session, closing at $31.34 or around 30 percent higher. That demand was in part due to the limited nature of the offering, with only around 20 million shares being offered, but was presumably also indicative of investor confidence. Despite that, as the Wall Street Journal reports, there are plenty of skeptics who don’t see any value in the stock. They are wrong.
Their argument is that GoPro is a hardware manufacturer and, while trendy right now, faces an uncertain future at best as others begin to make the same thing, only cheaper. Those making that argument are missing the point. I have, in the past criticized companies for this very thing. Trendiness in hardware is a fleeting thing and commoditization can come all too swiftly. Where the naysayers get it completely wrong, however, is in the assumption that GoPro is simply a hardware company.
If you actually listen to the plans of management it is clear that they understand this basic problem. Yesterday, in the inevitable round of appearances, the company’s co-founder and CEO Nick Woodman was at pains to point out that GoPro expected to continue to grow rapidly, but more as a media company than a hardware manufacturer. This is where investors perceive value.
The skeptics would point out that, despite millions of users uploading content and over 500 million views of GoPro videos on Google (GOOG)’s YouTube alone, they have yet to derive any revenue from content. True; but once again, missing the point. GoPro already has deals in place to collect advertising revenue through partnerships with Microsoft (MSFT)’s Xbox Live and dedicated channels on YouTube and Virgin America. Those revenues are expected to begin streaming this quarter.
I have been skeptical of tech company IPOs, or of the stock shortly after, in the past. Twitter (TWTR) would be a good example. In that case my main objection was that Twitter had not found a way to effectively monetize their popularity and, at the time of their IPO, had never turned a profit. I recently changed my view as TWTR seemed to have found a bottom at around $30, right as the company seemed to be figuring out how to make money, but I digress. The point is that that problem in no way applies to GoPro.
They have been profitable for a while and are currently experiencing phenomenal growth. Revenue grew 87% from last year to this. It is true, as some of the doubters have pointed out; that margins have shrunk somewhat, but at 37% they are still respectable. The addition of media and content should help with that and most of the decrease was down to increased R&D, the very thing that is driving the revenue growth.
It is not as if the valuation is excessive, even after yesterday’s 30 percent jump. The initial offering valued the company as a whole at just under $3 billion, and even at $4 billion after the initial rise, a case can be made that the stock is anything but expensive. As Peter Garnry, Saxo’s head of equity strategy, points out here if you include the potential of GoPro in the media space, the stock represents a good opportunity for long term investors, and can even be seen as cheap.
It seems to me that the overwhelmingly negative coverage of GoPro in the last 24 hours is mistaken. This is not a one trick pony, nor is it a company with enormous, fleeting popularity and no record of profitability. GoPro has already worked out how to make money at good margins and has a plan to continue growth, regardless of increased competition. What they have, above all else, is an innovative business model. I cannot think of a better one in some ways. Have customers buy your product and then make what are essentially promotional videos for you; videos from which you derive advertising revenue from multiple sources. When you stop and think about it, it is pure genius!