GoPro Inc to $30 Within 12 Months – The Comps Wall Street Isn’t Talking About by Citron Research. Also see Copperfield Research Hints At GoPro Inc (GPRO) Accounting Issues
Over the past month Citron has read over 100 articles and analyst comments about GoPro Inc (NASDAQ:GPRO), both positive and negative. To date, not a single commentator or analyst has laid out the truth regarding this company’s promotional “we’re a media company” story.
GoPro Inc (NASDAQ:GPRO) is a tech hardware company. Yet it has spun a story, which is a very convenient fiction, for Wall Street to parrot: that it can become a “media company”. Why? Because users are uploading some of their videos to YouTube? Citron will now decisively document the gap between the most optimistic conceivable valuation that this company can ever command, and the current stock price.
At yesterday’s close of $84.32 per share, the company sports approximately a $10 billion market cap. Let’s evaluate this in light of reasonable comps on both their hardware and their dream of a media business, and see how it stacks up.
Clearly, GoPro Inc (NASDAQ:GPRO) manufactures and markets a leading electronic video camera which is all the rage. They turned in a big quarter and nobody begrudges them the success of achieving a big score in the consumer electronics marketplace. But long term success in the consumer electronic industry is highly elusive to maintain, as evidenced by this chart (by a Seeking Alpha writer). The reality is that, analyzed historically, nearly all tech hardware device companies have a brutally difficult time maintaining consistently high margins. The following graph illustrates the point decisively:
For this reason, hardware and gadget gear companies do not become Wall Street Darlings… for long.
Don’t Listen to Citron — Listen to Apple Inc. (NASDAQ:AAPL).
The clearest comparison to GoPro Inc (NASDAQ:GPRO) is Beats Headphones.
Beats had all these things going for it:
- Huge Brand Recognition
- High Margin
- A Compelling “Cool Factor”
- A Media Element to its Valuation Story
- Strong and Relevant Management (Jimmy Iovine)
And on a takeout, Apple Inc. (NASDAQ:AAPL) bought Beats for 2x revenue (and that is an acquisition price by a strategic partner).
Here’s how Morgan Stanley assessed the acquisition:
UBS (May 28, 2014): “Beats had $1.1bn of revenue in 2013 and we estimate close to $1.5bn this year. A price of 2x sales seems reasonable to us given apparently high margins.”
Morgan Stanley (May 29, 2014): “At a $1.4B 2014 revenue run-rate (up from $1.1B in 2013), the $3B acquisition represents 2.1x EV/Sales, lower than Apple’s current valuation of 2.3x.”
At the time of the acquisition, much of the media opined that 2x sales was high for a product in a commoditized industry. Citron further observes that Beats has a larger total addressable market and a stronger consumer brand whose products are as much fashion statements as electronic devices. Compare the counterfeiting of Beats in China vs the “knocking off” of the GoPro Inc (NASDAQ:GPRO) in China.
The Bottom Line on GoPro’s Hardware Business
For the sake of argument, affording GoPro Inc (NASDAQ:GPRO) the benefit of all doubts, Citron projects GoPro’s revenues all the way out to 2017. For this we take the highest analyst’s benchmark in the entire analyst universe, and disregarding any and all execution risks, including competition, pricing pressure, market saturation, cannibalization by lower-price points, and inventory risks. With a stroke of the pen, lets confer upon them $2.1 billion in gross revenue. At a 2x revenue multiple, this gets us a stock price of –$33.60 per share.
The reason Citron uses price-to-sales is that it is only fair to any rational investor. We refuse to write a story where a commoditized camera maker, projecting growth in its core business below 5% per year in 2016 (2 billion to 2.1 billion), is conferred a 60X earnings multiple for 2016, while their management discloses their own concerns about the limitations of their growth curve in their prospectus.
See full PDF here.
