GoPro Inc (NASDAQ:GPRO) has been off to the races since its initial public offering earlier this year. Of course the biggest problem with momentum stocks is simply trying to place a value on them. However, valuation king Aswath Damodaran provided his commentary on GoPro in a post on Seeking Alpha.

GoPro

GoPro’s potential market

One of the key parts of valuing a high-growth company is the size of its potential market. Damodaran looks at GoPro’s potential market in three areas. He notes that smartphones are threatening the conventional camera market. Also GoPro’s cameras allow users to do what smartphone cameras can’t, and that is take action video, however, there is a smaller subset of camera users who actually want to take action video.

In order to estimate just how large this subset is, he looked at the Centers for Disease Control’s statistic that suggests that approximately 22% of Americans are physically active. When applying this percentage to the smartphone market, that leaves about an $80 billion market for GoPro, potentially. He thinks this is probably an over-estimate because not everyone who is physically active also likes to share videos of what they do on social media.

He adds that another survey indicates that 31% of adults post videos on their social media accounts and that this number is increasing. It’s higher among adults between the ages of 18 and 29. Using this statistic, that makes the market closer to $31 billion. Assuming a 5% growth rate, that makes the potential market $51 billion in 2023.

Estimating GoPro’s profit margins

Damodaran goes on to estimate GoPro’s revenues at $10 billion in 2023, granting the company a 20% share of the camera market based on the entry of competition into the action camera market. He also assumes that GoPro builds its brand as an advantage since it was the first one on the market.

In terms of profit margins, he notes that GoPro has the first mover advantage, which enables it to charge premium prices and see a pretax operating margin of 12.5%. That’s a little lower than the previous margin of 13.43%, but it’s a lot higher than the margins of other camera companies, which are closer to 6% or 7.5%. He assumes GoPro will get to keep its premium pricing because of its brand going forward.

GoPro is hardware

He also notes that GoPro is going to have to keep investing in manufacturing capacity and research and development so that it can produce and sell more and more cameras. As a result, the company will need to reinvest to keep things going. He estimates that for every $2 in extra revenues in the first ten years, GoPro will have to reinvest $1 of it. This moves the return on capital from where it is now to approximately 16% in a decade.

In terms of risk, he assumes that the company deals with the typical risks that high-end electronics companies must deal it. He estimates a cost of capital of 8.36% and believes it will fall to about 8% by the tenth year.

GoPro’s media attempts

He also addresses GoPro’s attempt to transform itself into a media company in addition to cameras. This is an area of contention between bulls and bears. He thinks it’s possible that GoPro will be able to do this, and he says if we assume that the company can successfully make itself into a media company, that “may be sufficient to tilt the scale” toward buying its shares.

However, he also says this assumption does not make up for most of the value investors have placed upon GoPro shares right now.

Damodaran’s valuation of GoPro

Currently, he sees a value of only $32 to $33 a share for GoPro. However, upon changing the assumptions, some outcomes will make the company worth much more. (GRAPHS ARE COURTESY Aswath Damodaran and Seeking Alpha)

GoPro Valuation

In general, he thinks GoPro is overvalued, but he also points out that there are some pathways to a share price that’s even higher than where shares are priced currently.

Tags: