When Nick Woodman, founder and CEO of
GoPro ( Nasdaq:
, appeared on "60 Minutes" last November, his company's fate was
showed a variety of amazing feats you could accomplish with the
company's ruggedized, miniaturized wearable digital camcorders --
and it led to a huge spike in orders for the company. That led
Woodman to realize that the buzz around the company was so loud
that it was time to start preparing for an initial public
Fast forward to June 26, 2014, and GoPro's public debut has
marked the company as one of the hottest -- and perhaps most
controversial -- new issues on the market.
How hot is this stock? Priced at $24 a share, GPRO opened at
$28.65 and is already up in the low $40s (though below its $49.90
For investors looking for a piece of the action, a classic
conundrum has emerged: Do you buy the hot IPO in expectation of
robust price appreciation in the years ahead as sales grow -- or
do you hold off and wait for the air to come out of the
After all, some hot IPOs soon reverse course. Remember that
opened for trading above $42 -- and was below $20 just a few
months later. Moreover, short sellers appear to be circling GPRO
as anecdotal reports suggest that there are few shares left to
borrow for short positions.
Thus far in its short life as a public company, GoPro still
has upward momentum:
Before assessing the stock, let's look at GoPro's operating
The company had sold 4.7 million cameras in its brief history
up until the end of 2012 before selling another 3.8 million last
year, equal to 87% sales growth. The company had $235 million in
sales in the first quarter (which is seasonally weak), and 2014
total sales will likely exceed $1.5 billion this year, up from
$986 million last year.
Is that sales target conservative? Too aggressive? Analysts
will weigh in with their earnings models after the 25-day quiet
period ends, and the company may also provide full-year guidance
around that time when second-quarter results are released. We may
not really know about 2014 growth rates until next winter, as
GoPro derives more than a third of its sales during the fourth
The good news: GoPro is already profitable. The bad news: It's
unclear that profit margins will be all that great.
Is GoPro just a camera company, or is it a
game-changing social media/hardware company?
The company's first-mover advantage gives it decent pricing
power now, but rival camcorders are likely to deliver cameras
with similar functionality at lower price points. The company
lays claim to more than 40 patents, with many more pending. But
it's hard to see how rivals won't develop workarounds that skirt
the company's base of intellectual property.
And therein lies the conundrum for investors: Is GoPro just a
camera company, or is it a game-changing social media/hardware
The answer will be determined by whether shares will
ultimately be valued like a commoditized producer of hardware
(which is typically worth 1 to 1.5 times sales) or a leading-edge
tech firm that can justify a valuation of 5 or 6 times sales.
(Right now, shares are valued at around 5.5 times trailing sales,
and perhaps 3 times projected 2015 sales).
To get the new-age sizzle that justifies a higher multiple,
GoPro needs to quickly cultivate revenue streams beyond camera
sales. The company plans to showcase ad-supported videos, and in
a best-case scenario, would become a destination like
or Facebook, but for adrenaline junkies who like to shoot
In some respects, the move to develop a GoPro social media
platform could greatly help the perception around this stock.
Heavy spending to build out that part of the business will
consume all of the company's profits -- and sometimes, investors
are actually more gratified to see a still-unprofitable firm that
can't be measured by a P/E ratio than a marginally profitable
firm that sports a sky-high P/E.
For investors, there are a few other things to consider in
assessing this unique business model.
For instance, GoPro has established itself as a very savvy
developer of products while pursuing a rock-solid marketing and
branding strategy. For some investors, such skills will earn a
lot of goodwill, as the company will presumably be able to stay
on the leading edge. (Still, as noted, it's hard to see how the
core camera can maintain technology leadership, despite the
patent base, in such a commoditized field).
The company's efforts to build a compelling social media
platform is crucial for investors that think this company is
merely being built to be sold at a higher price. More than 2
million people subscribe to GoPro's YouTube channel (albeit with
little advertising monetization off of that base right now).
Clearly, a large installed base of sticky customers will lure
the likes of
, Facebook or
, all of which gladly pay huge premiums to acquire hot
properties. Then again, a company like Google, Samsung or
may already be developing a GoPro rival, and if such news leaked
out, shares of GoPro would take an instant hit. (GoPro spent
nearly $30 million on research and development in the first
quarter, a fraction of what the major tech firms spend on
In the near term, GoPro will need to deliver a knockout second
quarter (in a month or so) to maintain investor interest. To get
a rough sense of what to expect from GoPro over the next six to
eight quarters, we can look at the early public histories of
Facebook and Twitter.
After heavily hyped IPOs, both of those firms initially
struggled to generate revenues from their sizable audiences.
Facebook eventually learned how to better monetize its base, and
hopes are rising that
Twitter may also finally be doing a better
on that score.
If those histories are any guide, then GoPro may stumble badly
in coming months if it is slow to develop a robust advertising
model around its website -- but once it learns the tricks of the
trade, then shares could stage an impressive snapback rally.
Action to Take -->
For shares to move higher, a lot has to go right for GoPro:
Camera sales need to keep rising at a very fast clip; the company
needs to start proving its ability to generate ad revenues off
its social media platform; and major tech firms can't make any
noise about delivering similar products. Considering the
impressive early gains this stock has already registered, those
risk factors might just be too great to justify buying shares
now. Instead, this is a stock to track, one that would hold
greater appeal at prices closer to its IPO price. Few had the
patience for such thinking in the early days of Facebook's and
Twitter's debuts, but patience proved to be a virtue with those
stocks as well.