GoPro Inc (NASDAQ:GPRO) unveiled three new cameras on Monday, and investors responded with excitement. The story stock seems bent on hitting $100 a share after skyrocketing by nearly 300% since the company’s initial public offering just a few months ago.
But how much is GoPro even worth and will investors push it over the psychological $100 per share mark?
Analysts struggle to keep up with GoPro
After the introduction of GoPro’s Hero4 Black, Hero4 Silver and Hero, analysts started bumping up their price targets for the company. FBN Securities analysts raised their price target from $70 to $90 per share, while Piper Jaffray analysts increased their target even more, from $60 to $90 per share.
GoPro started trading at $24 per share toward the end of June, and now its stock is on a tear that just doesn’t show signs of ending.
Will GoPro hit $100 per share?
Bidness Etc considers whether GoPro shares will ever pass $100 a share. The stock is within striking distance of it, and if investors keep pushing shares higher today, it certainly will. However, it’s clear that some investors are skeptical.
Short interest has been rising steadily, with about 8.5 million shares being sold short as of the latest data from NASDAQ. That’s a nearly 30% increase since the previous report, and it’s about 41% of the float. Of course with such high short interest, it’s worth considering how much, if any, of the current inflation in shares is due to short covering. We won’t know for a while.
The steady rise in short interest is undoubtedly because of how expensive GoPro stock has gotten. The company’s forward price to earnings multiple is an unbelievable 93 times. Its forward price to sales multiple is 7.5 times.
How can GoPro justify its share price?
Business Insider‘s Henry Blodget explains what all will have to happen in order to justify GoPro’s exorbitant stock price. He says investors will have to gaze more than 100 years into the camera maker’s future and then discount the performance “at a rate that appropriately compensated you for the risk associated without the stock.”
He notes that it isn’t unusual for companies to skyrocket during their massive growth years early in their lives. However, it’s only a matter of time until these companies’ growth slows down. Eventually, companies that trade between 10 times and 20 times earnings fall back to a multiple that’s within the average of their respective markets.
The numbers GoPro needs
Blodget explains that with a multiple of 10 to 20 times earnings, GoPro would have to turn a profit of between $550 million and $1.1 billion. Currently the company is posting GAAP losses, but of course growth companies are not valued on their current earnings. They’re based on future projections, so current multiples don’t really matter—if future profits will be high enough to let the multiple fall to an average level while also giving current investors “a reasonable rate of return.”
He adds that most investors wouldn’t be too happy with GoPro’s future performance if it’s only within this range. He estimates that investors would want the company’s shares to double or triple in the next ten years.
Another way to look at it is that GoPro would need between $1 billion and $3 billion in profits in ten years. Currently, the company has approximately $1 billion in revenue annualized. Since it’s a hardware company for now, it has low margins, although GoPro is trying to transform into a media company, which enjoys higher profit margins. He estimates that with a 15% margin, GoPro would need revenue of between $5 billion and $15 billion.
But are these numbers realistic? Of course it depends on whether any real competitors emerge, and it seems likely that one will. Blodget thinks it will happen within the next ten years.