Aswath Damodaran, a Professor of Finance at the Stern School of Business at NYU, published a blog on the subject of current valuation of GoPro Inc (NASDAQ:GPRO), and points out it’s difficult, though not impossible, to justify buying GoPro on an intrinsic value basis.

Aswath Damodaran in his blog published on October 16, 2014 titled: “Go Pro: Camera or Smartphone? Social Media or Electronics? Price or Value?” notes though the expected value across various simulations is only $33-32 per share, well below GoPro’s current market price of $70, there are outcomes that deliver values higher than the market price.

GoPro stock

GoPro’s $51 billion market size

Starting off with a brief background of GoPro, Damodaran notes GoPro makes cameras that one can attach yourself and record video of your activities. Moreover, it’s designed for high-energy physical activities, including running, rock climbing, swimming or hunting. GoPro Inc (NASDAQ:GPRO), in its most recent earnings report, highlighted that its videos published on YouTube had increased 200% over the previous year, and launched a GoPro channel on Pinterest and Microsoft Xbox to bring more attention to the videos. Having found a ready market for its cameras, the firm’s revenues touched $1,033 million in the twelve months ending in June 2014:

GoPro History

Damodaran notes GoPro’s stock has been on fire since its IPO on June 26, jumping 30% on its offering price (from $24 to $31.44) and moving up to $94 on October 7, before closing at $70 on October 15.

He argues that GoPro Inc (NASDAQ:GPRO)is a subset of smartphone accessory market. Hence, he notes the overall market for action cameras is $31 billion in 2013 and applying a 5% growth rate on this market, by 2023, there will be a potential market of $51 billion:

Market size

 

First mover advantage

Damodaran notes the action camera market will be a subset of the smartphone market and its customers will be those who are physically active people who also happen to be active on social media.

Focusing on the profit margin, he highlights that GoPro Inc (NASDAQ:GPRO)’s first mover advantage has given it a head-start allowing it to charge premium prices and earn a pre-tax operating margin of 12.5%, similar to the 10%-15% margin reported by smartphone companies.

Camera Market

camera market share

On the risk front, he notes GoPro Inc (NASDAQ:GPRO) has a social media focus for its user-generated videos, though the company presently generates all of its revenues from selling cameras and accessories. He assumes GoPro’s risk will resemble the risk of high-end electronics companies.

Damodaran notes the market is pricing GoPro more as a social media company than as an electronics, camera or leisure product company.

Considering the spectrum of choices on the inputs, including revenue growth, operating margin, he points out it’s perhaps more realistic to assess the value of GoPro Inc (NASDAQ:GPRO) as a distribution than as a single estimate of value:

GoPro Simulation Results

Damodaran highlights that the expected value across the simulations is only $33-32 per share. Thus, he thinks that the company is currently over-valued, though there are pathways to values higher than $70. He points out that reaching that valuation would require the company to expand the market for cameras to new users, find a strong, sustainable competitive advantage over its imminent competition and preserve its premium pricing edge.