GoPro shares fell 2.53% to $50.44 in early trading Monday after Goldman Sachs initiated coverage of the stock with a Neutral rating. Goldman analyst Simona Jankowski said in a research note Monday that the action camera maker could sustain its leadership position in the market. But GoPro’s ability to maintain above-20% growth rate beyond 2015 depends on drones, a segment with limited visibility.
Drones partially reflected in GoPro’s valuation
Jankowski said GoPro’s drone ambitions are already partially reflected in its valuation. Goldman Sachs has a $60 price target on the stock, reflecting a 19% potential upside from current levels. Jankowski doesn’t support the view that GoPro’s business will commoditize. GoPro’s growth will be driven by its aggressive content strategy and strong content engagement. The company has 3.5 million subscribers on YouTube.
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However, she points out, the San Mateo-based company’s CY2016E P/E of 28X requires GoPro to sustain above 20% growth over the next three years. That would largely depend on the success of the company’s drone business and content monetization. Goldman Sachs said limited visibility in the drone segment and content monetization was the key reason it assigned a Neutral rating on the stock.
Drones to help GoPro sustain high growth
After months of rumors and speculations, GoPro CEO Nick Woodman officially announced in May that the company would launch consumer drones in the first half of 2016. It was a sensible move considering consumer drones usually carry GoPro cameras to capture aerial footage, and their users overlap with GoPro’s user base. Aerial videography using GoPro cameras has become an almost integral part of everything from sports to weddings.
The drone market is expected to be worth $1.4 billion 2015, likely reaching $5 billion by 2017. Drones could be “a significant multi-year growth driver for GoPro.” Entering this segment would help the company sustain its 20%-plus growth rate, otherwise the growth may dip to around 15%, said Goldman Sachs. The action camera maker is expected to post a revenue growth of 36% in 2015, compared to 41% last year. GoPro’s 2016 and 2017 revenue growth is projected at 12% and 28%, respectively.