GoPro (NASDAQ:GPRO) | Adventure of a Lifetime


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Key Points


  • GoPro manufactures action cameras and is in the midst of pivoting the business towards higher-margin sources of revenue.


  • Subscriber count grew by >120% y/y, reaching 761k subscribers paying US$49.99/year. This revenue stream commands >70% gross margins vs low-30% for hardware.


  • Meanwhile, GoPro is also shifting its sales mix towards DTC (GoPro.com), which is expected to be another driver of margin expansion.


  • Re-opening proxy due to resumption of leisure travel and sporting events.


  • Potential fair value estimate of US$16.21.


Background


GoPro, a brand synonymous with adventure and travel, requires little introduction. Its current product suite includes cameras as well as mountable and wearable accessories globally.


GoPro went public on the NASDAQ in June ‘14 at US$24 to much investor fervour, with the stock reaching a high of US$93.85 in Oct ‘14.



However, units shipped peaked out at ~6.5m units in 2015 and the stock price embarked on a free fall to the ~US$10 range, where it remained dead money due to lack of growth prospects and the bungled launch of the Karma line of drones.



GoPro’s Narrative Shift


1) Shift to subscription revenue


Legacy GoPro was highly dependent on largely unpredictable hardware revenues driven by sales of its cameras, drones and accompanying accessories. The earnings quality of the hardware business was also unspectacular, with gross margins in the low-30% range.


As part of attempts to reinvent the business, GoPro launched its subscription service GoPro Plus in 2016 to create value-added services for its users. At launch, the benefits of the subscription included 250GB of cloud storage, discounts, and access to features of the Quik App (to be discussed below).


Today, this service has rolled out globally and has layered on additional features such as unlimited cloud storage, camera replacements, access to premium features of the Quik App as well as live streaming features on their cameras. Consumers can purchase this subscription service for US$49.99/year.



Execution on this front has been decent over the years, with the number of subscribers growing q/q by at least mid-single digits over the past couple of years. Notably, subscriber growth accelerated in 2020 during the COVID-19 pandemic, reaching 761k subscribers in 4Q20.



According to CFO Brian McGee at a Morgan Stanley TMT Conference, subscription revenues command gross margins of >70% and operating margins of >50%. Given the latest subscription figures and run rate, GoPro is on track to building out a fast-growing recurring revenue source that commands superior earnings quality compared to the legacy hardware business.


Moreover, GoPro has also decided to monetise its GoPro Quik App starting in 1Q21, charging users US$9.99/year for access to premium features. This app allows users to import media from multiple devices (iOS, Android, GoPro) and provides a convenient way for them to edit, store and share their footage and images. While this revenue stream is still in its infancy without concrete numbers demonstrating its success or traction, I believe this further demonstrates GoPro’s shift in focus to providing value-added services to its captive user base.


2) Shift to DTC channels


Traditionally, GoPro has relied heavily on retail channels to sell its hardware products. However, as volume growth decelerated in 2020 due to lockdown measures, GoPro took the opportunity to further rationalise its channel structure. This involved trimming the number of distributors and retailers and re-focusing their efforts on their direct-to-consumer (DTC) channel, GoPro.com.



Over the past couple of years, sales from the retail channel have plummeted from 89% of revenue to 67.5% as of the latest earnings release in 4Q20.


The CFO commented that the sustained shift in GoPro’s channel strategy in favour of the DTC route would be positive for margins in the longer term. Additionally, I believe this might give GoPro more control of their CRM, potentially unlocking more levers for revenue growth in the form of upsell opportunities.


The twin drivers of margin expansion in terms of shifting to recurring software-like revenue and pivoting to DTC have already borne fruit for GoPro, with gross margins improving by 15.2 ppt over the past three years.


"GoPro's shift to a more subscription-centric consumer-direct model is resulting in a simpler, more profitable business with materially better cash generation,"


- Nicholas Woodman, GoPro's founder and CEO.

GoPro as a Re-opening Proxy


While internal efforts are being made to revamp the business, GoPro could also be a beneficiary of broad border re-openings. While volume shipped collapsed by 81.6% q/q in 1Q20 because of the pandemic, the subsequent quarters in 2020 displayed sustained q/q improvements due to the effects of the re-openings and a seasonally stronger 2H.


With global inoculation rates increasing and as more nations re-open their borders for leisure travel, we could see a rebound in hardware sales volume as it becomes more feasible for common GoPro use cases like travel, adventure and sporting events to resume.



Hardware volume growth should also bode well for new subscriber adds due to GoPro’s current bundling promotion - GoPro is offering a US$100 discount to customers who purchase the subscription plan together with the HERO8, HERO9 or Max action camera models. The management team has asserted that attach rates for subscription purchases were ~90% for 2020 as well as going into 2021. Should attach rates remain high, the company could benefit from both a rebound in hardware sales and sustained growth in their highly profitable subscription business.


Valuation


Key Assumptions for 2021F

  • Market re-rates the subscription business to 10x revenue

  • Subscription business hits management guidance of 2m subscribers by year-end

  • Hardware business trades at 25x EBIT multiple

  • Hardware volume displays modest y/y growth with increased DTC sales mix

  • 10% WACC


At current levels, the market seems to only be pricing the legacy hardware business. However, with continued success in execution, GoPro could be a beneficiary of both earnings growth and multiple expansion as the subscription segment continues to create value for the business. In such a scenario, the stock could trade at a fair value of US$16.21 or 23.9% above current levels.



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Catalysts


1) Better than expected new subscriber adds

Management has guided for one million subscribers by 2Q21 and two million by year-end. Hitting these milestones implies that the subscription segment could command US$100m in ARR at >50% operating margins by the 4Q21 print. Hence, higher than anticipated subscriber numbers could be positive for overall margins and earnings.


2) Minimal subscriber churn

Please refer to “Subscriber Churn” in the risk segment below. Should subscriber churn remain under control around the 3Q/4Q21 prints, this would indicate that GoPro’s go-to-market strategy for their subscription service has been successful, which could be positive for customer lifetime value and earnings.


Risks


1) Subscriber churn

During the launch of the latest GoPro HERO 9 in Sep ‘20, a bundle discount was offered to consumers who bought the camera together with the GoPro subscription. Given that the subscription is offered on an annual basis, heightened churn levels around the initial renewal dates around 3Q/4Q21 would indicate that the supercharged subscription growth figures were due to a one-off marketing gimmick and that GoPro has underestimated its customer loyalty. This could be negative for long-term earnings.


2) Execution risk

While GoPro’s focus on DTC channels might improve margins, they are essentially shrinking the top end of their marketing funnel since retail and distribution channels are efficient ways to reach a large audience. If management does not handle the transition well, it could result in dampened sales volume and by extension decreased absolute revenue/profit.


3) Competition risk

GoPro faces competition from direct competitors like DJI and indirect substitutes like smartphones. These could pose headwinds to volume growth.


Conclusion


GoPro’s new narrative is centred around the transition to subscription revenues, which has worked out well for businesses in a variety of industries (ie. Adobe, Walmart, Amazon, Apple, Restoration Hardware). If executed well, this could increase customer lifetime values, which in turn could boost shareholder value. While it is still too early to call GoPro’s transition a success, we look forward to watching how it plays out.


Disclaimer: We are short GoPro $10 July 16 puts. This article is not an investment (buy/hold/sell or otherwise) recommendation, this is only for educational and discussion purposes. This article is not tailored to the specific circumstances of any reader. I/we/The Snowball do/does not purport to be in the business of providing financial advice and the contents of the article should not be regarded as such.


Cover photo by Vicko Mozara on Unsplash

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