GPRO - GoPro Inc

[Simple Investor]

wjsco great post. 

 

I think the biggest risk here is the CEO.  This guy is handing out stock options and RSU's left and right.  Major dilution. Im not sure if the dilution is different from other tech companies in the early stages after going public.  But it still seems high.  Throw in the 75mm in new stock issued and it shows bad capital allocation. 

[wjsco]

thanks SimpleInvestor,

 

agreed...he is paying himself and all his buddies - even after they blew it. This is a "YOU HAD ONE JOB" kind of thing, where that one job was to have a new product for christmas. I cannot fathom the discussions they had that resulted in deciding against a refresh...clearly not a Bill Gates, but he did come up with, and market, a new/compelling product. Really the only thing I care about is the product - i wouldn't feel uncomfortable saying management is trash, and that i am still long.

 

I almost certainly would not buy and hold, but a year or two? Sure!

[Ice77]

Been half a decade since someone posted here. This stock has been nagging me for a few months now. Although I have a base position through calls, I'm unable to make up my mind conclusively.

 

Clearly there is some kind of moat here otherwise they wouldn't be able to sustain a market share of 85% in action cameras after all these years. Also their ASPs have been rising (& they are guiding them higher) so there is some embedded pricing power as well. The argument that this is a niche category has some merit but the use cases for their cameras are growing every year (During Covid, there was a surge in people wanting to use them as high quality webcams). The company has also redrawn their sales channel and now 30% of sales are D2C via their own website and this obviously carries higher margins than traditional brick and mortar retail. Also has much better working capital than retail. And this % is expected to rise to 40% by YE 2021. On top of that they've launched a subscription service (unlimited storage of videos, discount on accessories, video/photo editing etc) for $50/y and it has 800K subscribers already and expected to touch 2m by the year end. That's a 70% GPM business stream generating potentially $100m in revenues. On top of that, you have now significant cash generation and by year end they should have 25% of the current market cap as net cash (management is talking buybacks and tuck on software acquisitions). They are seeing strong unit growth in Asia as younger people aspire to own a GoPro there (just do a search on social media). Mindshare remains astoundingly high. 1x sales doesn't seem rich to me for the transformation undergoing there. Post covid, there may even be restocking of retail channels improving sell-in. Clearly market disagrees here so I wonder what gives.   

 

 

[Ice77]

Probably nuts to compare the two but the D2C model that GPRO is laying out is similar to what Nike is focusing on as is Adidas and such a model has immense benefits not just on immediate PnL and CF but also on LTV:

 

Here's from a newsletter this morning on Nike:

 

"The focus on eCommerce has obviously been accelerated by the COVID-19 pandemic (and the general shift of commerce worldwide). Still, part of me thinks they’ve seen the strategy that Nike has rolled out and want to participate. In an effort to become a “digital-first organization,” Nike has spent the last few years strategically shifting their retail strategy. Nike cut ties with thousands of retailers across the country last year, accepting no new orders and cancelling any outstanding orders — even stores that carried the brand for more than 40-years. Rather than selling inventory though department stores & wholesale outlets, Nike has built smaller stores called "Nike Live," which serve as pickup hubs for online orders, and multi-level flagship stores called "House of Innovation.”

 

Nike CEO John Donahoe says: “We are doubling down on our approach with Nike Digital and our owned stores, as well as a smaller number of strategic partners who share our vision to create a consistent, connected and modern shopping experience.”

 

Simply put, they want to own end-to-end distribution. Why? Well, it helps with obvious things like inventory management & improved customer service, but the real benefit comes through digital transformation. Nike stores allow customer to scan barcodes for pricing, check available inventory & complete their transaction — all through the Nike app. By creating an end-to-end distribution model that reinforces digital interaction, Nike can improve the underlying economics of their business. Not only does Nike earn 10% higher margins on digital sales, but a customer who connects with Nike on 2+ platforms has a lifetime value that’s 4x higher than those who don’t.

 

Even better? It’s working. Nike reported a 84% increase in digital sales last quarter, which now represent over 25% of their sales in North America, a goal they didn’t expect to hit until 2023. In the coming years, they expect digital sales to represent 50% of their overall business — a remarkable achievement."

[Longnose]

Simply put, they want to own end-to-end distribution. Why? Well, it helps with obvious things like inventory management & improved customer service, but the real benefit comes through digital transformation. Nike stores allow customer to scan barcodes for pricing, check available inventory & complete their transaction — all through the Nike app. By creating an end-to-end distribution model that reinforces digital interaction, Nike can improve the underlying economics of their business. Not only does Nike earn 10% higher margins on digital sales, but a customer who connects with Nike on 2+ platforms has a lifetime value that’s 4x higher than those who don’t.

 

Even better? It’s working. Nike reported a 84% increase in digital sales last quarter, which now represent over 25% of their sales in North America, a goal they didn’t expect to hit until 2023. In the coming years, they expect digital sales to represent 50% of their overall business — a remarkable achievement."

 

Simply put, they want to own end-to-end distribution. Why?

• Something else that many overlook here is high end luxury brands are struggling to maintain pricing power and distribution control in the online marketplace world that Amazon has created. I work in the brand protection space. Nike does not authorize sales on Amazon.com. Nike products found on Amazon.com are either gray market goods or counterfeit. The often overlooked problem brands are struggling with gray market goods eroding pricing power on Amazon.com. Nike is locking down distribution and cutting out retailers and distributors because its the only way they can control who is selling their products online and what prices they are being sold at. The traditional retail and distribution models allows for diversion of authentic goods at discounted prices that show up online and erode prices. Example: small retailer buys product from distributor -> retailer has excess inventory and liquidates -> Amazon 3rd party seller buys liquidated inventory at discounted price -> Lists on Amazon at 30-50% off -> large authorized retailers match prices to Amazon.com to compete -> Large authorized retailers ask for better pricing to maintain margins. -> products profitability suffers for everyone.  As Nike tightens up their distribution and focuses on D2C transactions they will also maintain/regain pricing power and improve their customer satisfaction rate.
  
• In the case of GoPro I know for a fact that they struggle with this same gray market issue. They are constantly battling gray market products online eroding the prices of products. I don't know how they are handling it. I know many luxury brands have management teams that are built of executives from the retail world. Many retail brand executives don't truly understand how the e-commerce game works. I believe Nike is taking the right steps in evolving towards how to thrive as a luxury good in an ecommerce world. I personally believe that any luxury brand that doesn't figure out how to tighten up their supply chain will lose pricing power online. I would argue that GoPro does have a "brand" moat and are not likely to go away anytime soon but can they maintain that pricing power over time? That I don't know.
  

 

I have looked at GoPro periodically as I believe brand companies are well within my circle of competence. I haven't looked at them since the pandemic. Every time I looked at them previously they were priced higher than I wanted to pay.

 

Good Luck

 

[Ice77]

Thanks for the perspective. I agree that this brand has staying power as all the fears around technological obsolescence amid rapidly changing technology haven't made much of a dent in its action camera market share or strong/rising mind share.

 

I share some images (click to expand) to give a sense of just how strong the brand's social media presence is across every single platform. They have more than 17m subscribers on IG, 10m+ on Youtube, 10m+ on FB, 2m+ on Twitter with strong downloads of its app across both iOS and Android. Literally hundreds of tweets every hour. Clearly there is a significant respect for the product and/or the quality of its images or you wouldn't command this sort of adulation. And that presents lots of product and brand extension opportunities with the right execution in the right hands.

 

As for valuation, at 10% FCF yield, 1x EV/revenues with 25% Net Cash/Mcap at YE21, I don't think it is expensive for its market dominance, optionality and ongoing retooling that is improving virtually all metrics going forward.

[Ice77]

Not that I mind but there seems to be fear of a short squeeze building here ($130m+ SI). AH volumes are unusually high. Seeing some people link it to NFTs, once in a lifetime refresh cycle, Apple/Zoom M&A, WSB interest surge and what not. Peripheral issues at best but may not hurt in rekindling some interest in it.

[Ice77]

The meme crowd got in on this one or the squeeze has started. Either way my calls went up 4x in one week alone. The virality of the market is crazy.