Rise of the Phoenix or flames of the last ember? A GoPro analysis

Company Description and Current State: GoPro is a camera company that specializes in action photography and video capture devices. The core business is centered around its action camera product line with secondary revenue streams coming from mobile apps and video editing software. A GoPro device is an “action camera” designed to be worn on the body, freeing the user’s hands to participate in extreme sports and outdoor activities.  GoPro has been struggling financially, losing $419 million in 2016, $183 million in 2017, $109 million in 2018, and $15 million in 2019. The insolvency is a result of market saturation decreasing sales. A 2020 report found that units shipped peaked in 2015, but declined to their lowest point in 2019. Long upgrade cycles are central to the issue with a 2020 Market Line report commented that 50% of GoPro users use older versions of GoPro cameras. Upgrade cycles remain long despite key innovations in GoPro’s product line, specifically the HERO9, with new features like voice control and live-streaming. Management has identified a willingness to upgrade amongst its loyal consumer base.Given the low upgrade rate, it is inferred that customers are unaware of newer features and related value. Many investors have already written off GoPro as a failed experiment. Their stock valuation has skydived since it’s IPO in 2014. The company has made numerous mistakes at both the strategic and operational level, and have caused the company to stagnate and fall in valuation.  However, the company may stage a comeback in the upcoming year on the back of it’s new partnerships and the growth it’s DTC business and subscription businesses.  Is this the resurrection of the phoenix, or just the last flames of the dying ember? Here is why GoPro may be due for a come back.  Market Analysis: GoPro is a company that manufactures action cameras and develops its own mobile apps and video-editing software. It was founded in California in 2002 by Nick Woodman and now the company is one of the major market leaders in action video cameras.The do it yourself action video market is dominated by GoPro for multiple reasons. The major reason is that the miniature, mountable high-definition video camera is not that diverse to begin with. As in, new companies trying to work their way up the market chain will find it difficult to attract new customers because the products will be very similar to those already created by the market leaders like GoPro. So new companies will have to think of alternative ways to reach out to their target market and people within that market. Fast forward a few years, more successful competition arose as technology increased. This led to a market with GoPro involved in it with multiple companies pushing each other to think of new ways to stay on top. Within the market for durable, high-quality cameras exist recognizable market leaders, market challengers, market followers, and market nichers. Each group has an important role and share in the entire market as shown from the figure below. As stated prior, GoPro in this industry/market is definitely a market leader. To add to this point, GoPro has shipped more than four million action cameras in 2019.The company invests a lot of money in research and development to produce new products as it strives to retain its leading position in the action camera market as shown in the picture below describing the expenditure in thousands of US dollars An important part of a market leader is the being able hold your position on the top of that specific market. With other competitors like Garmin and Eastman Kodak entering the digital action-camera market, the concern for staying at the top of the market is one of GoPro's priorities. Due to the competition and setbacks, GoPro is trying to maintain its strong market share. With the action camera market growing at a compound annual growth rate (CAGR) of 11.24% for the next 10 years, GoPro is operating in a fierce competition with competitors and is heavily exposed to threats brought by technological advancements As a result of this alarming problem with the company's market status at stake, the millennials who are hungry for travelling and invested in social media provide the key ingredient for GoPro to retain its position as one of the top action cameras developers. This is because of what the “brand” means. When you think of action sports, whether on TV or in everyday life, brands like GoPro and Red Bull seem to always be around the action. That's resulted in a loyal following, despite the competition. Proving this point, GoPro's U.S. market share of 21.5% in digital cameras/camcorders was up 80 points from the previous year and included three of the five best-selling products in the category. This increase in market share came despite better offers from competitors in the same industry.  Total action camera revenue is expected to continue to rise, some estimates say that it may get up to 10 billion by 2026.The company additionally spends hundreds of millions of dollars each year on its sales and marketing budget in the hopes of increasing its share of the overall market. SWOT Analysis: GoPro has a number of advantages. First of all is their strong R&D capabilities - GoPro invested a reported $142.9 million into R&D in 2019, which accounts for 12% of their revenue that year. This shows strong commitment and capabilities in innovation and product improvement. GoPro’s innovative spirit was what led them to develop the first action camera in the world. Their brand name is strongly associated with their product and vice versa, giving them a strong brand equity and presence in the market. This comes from their hyperfocus on their particular niche, A large part of its product portfolio are supporting products for their main GoPro cameras, such as helmet mounts, handlebar mounts, memory cards and cases,... This builds even more onto their brand image. Back in 2015, they actually controlled 34.6% of the market share in the world-wide camcorder market.3  The GoPro ecosystem that the company provides is streamlined so that people can shoot videos and wirelessly stream them on the GoPro app, furthermore creating a seamless GoPro experience from start to finish. However, GoPro is not without internal problems. High operating expenses, mediocre revenue, and lack of independent investors from the stock market means that GoPro is not very profitable, especially with their reported losses since 2016, resulting in a low cash flow. The lack of cash flow means that GoPro is not very secure in their finances, limiting their operational opportunities and profitability, especially in the eyes of investors, who would then have reservations about pumping money into GoPro, creating a vicious cycle. It’s second flaw is, ironically, a result of its own excellence. GoPro’s products are very future proof, with older models still satisfying customer needs years after purchase. Thus, existing customers have little reason to upgrade to newer models, which limit the market share that they can sell to. Due to the reasons above, they have had little choice cutting back on R&D expenses, reporting $142.9 million in 2019 for R&D, compared to $358.9 million in 2016, despite revenue consistency. Even though these cutbacks helped them recover from debilitating losses since 2016, it has and will also limit their innovation, making them less appealing for consumers. 2 What’s more, the market niche that they have dug out for themselves is limiting them. With their product portfolio being as hyper focused on GoPro and its supporting products as it is, they do not have a large potential and accessible market, which gives them less operational flexibility than their larger competitors with their diverse products.  If GoPro is to grow as a company, they must find opportunities. Luckily for them, opportunities are abundant. The world economy has an upward growing trend, and as consumer dollars become more readily available, the potential market for GoPro also increases. People are also becoming more interested in action cameras, not just for actions, but for various purposes, such as an alternative for traditional, more bulky cameras for everyday uses, or just for the sheer novelty. This expanding global market provides ample opportunity for GoPro to gain market share and solve some of their aforementioned problems. Another potential market for GoPro is the increasing prevalence and normalization of VR technology and media. A market that they have already begun to wade in with their VR players and products. Alongside that, the growing demand for government bodycam, as well as everyday-use dashcam worldwide is also a potential market for GoPro to capitalize on, should they choose to branch out. These two market directions capitalize greatly on GoPro’s strengths and expertise. Competition is the biggest threat, even in their native action camera scene. There have been many emerging players in the action camera market, from established firms like Sony, Garmin, and Nikon, to more budget clones alternatives.These companies have been slowly but surely eroding GoPro’s once-dominant grasp on the market share. Not only that, GoPro also faces cross-segment competition from traditional camera makers as well as mobile devices companies - many of which are also GoPro’s active competitor, such as Sony. When it comes to pure image quality, GoPro faces the competition of traditional cameras and mobile devices, as ever increasing image quality from them deter a large portion of the market from seeing the need to buy a GoPro. Another threat that GoPro faces comes from legislators. As a tech company operating on a global scale, GoPro will need to navigate differing regulations across countries, in particular issues of environmental and data protection concerns. Regulatory bodies such as the EU imposes directives like the WEEE and the RoHS to address these concerns, and it will be costly for GoPro to navigate it, but even more so should it slip up. Any data and security breach could also lower customers’ confidence in the company, as well as result in some nasty lawsuits, both of which are bad for GoPro. Why the Future is (cautiously) Optimistic: GoPro made a lot of mistakes in the past, but that doesn't mean the company is going to continue to fail in the future.  Over the last few years, it’s management has streamlined its hardware/accessories business. It now sells only a few cameras at a premium price point and accessories/tools that go along with them like mounts, batteries, and cases. This focus has worked, with the average selling price of its cameras growing 13% in 2020 vs. 2019. GoPro is also rapidly transitioning to a DTC selling model. In the fourth quarter of 2020, 33% of GoPro's sales came from its DTC channel, GoPro.com, vs. only 12% in 2019. This should help GoPro improve its profitability and establish a more direct relationship with its customers. While all those things are nice, the most important part of GoPro's future is its subscription service, called the GoPro subscription. The $50 a year service offers unlimited cloud storage, discounts at GoPro.com, free camera replacements, and access to its new editing app called Quik (consumers can also subscribe to Quik on their own for $10 a year). At the end of 2020, GoPro had 761,000 subscribers, up substantially from 311,000 a year ago.   The company's financials as a whole suffered in 2020, due to a decline in camera demand because of the pandemic (there's not much to film if all the sports events are cancelled and traveling is limited). However, when you consider that the average selling price, DTC revenue share, and subscriptions were all growing, GoPro's 2020 looks a lot better than the headline numbers suggest. Why the future is still unclear for GoPro: At a market cap of $1.85 billion, GoPro trades at a price-to-sales ratio (P/S) just slightly above 2, therefore it is still not profitable. However, if you look at the unit economics of a GoPro subscription, things start to look a lot rosier. Furthermore, the financial numbers for GoPro still paints a bleak picture. Looking at the company's 2020 financials, the numbers are negative across the board. Having a negative profit margin, operating margin, return on assets and return on equity, the company’s financials still look unstable as well as unhealthy. Conclusion: Overall, it looks like GoPro's business is in a lot better shape than a few years ago. Investors should still stay cautious, as the company needs to prove there is a large enough market for its new subscription offering. They should also be careful of the company’s financials, as it still remains in bad shape. But if GoPro is successful in building out its new hardware/software ecosystem while also transitioning to a DTC model, we may see GoPro’s return to the original price evaluation. We should keep a close eye on GoPro during this upcoming year.

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Rise of the Phoenix or flames of the last ember? A GoPro analysis

May 7, 2021

bullish

general Analysis

[9 min Read]

Company Description and Current State:

GoPro is a camera company that specializes in action photography and video capture devices. The core business is centered around its action camera product line with secondary revenue streams coming from mobile apps and video editing software. A GoPro device is an “action camera” designed to be worn on the body, freeing the user's hands to participate in extreme sports and outdoor activities.

GoPro has been struggling financially, losing $419 million in 2016, $183 million in 2017, $109 million in 2018, and $15 million in 2019. The insolvency is a result of market saturation decreasing sales. A 2020 report found that units shipped peaked in 2015, but declined to their lowest point in 2019. Long upgrade cycles are central to the issue with a 2020 Market Line report commented that 50% of GoPro users use older versions of GoPro cameras. Upgrade cycles remain long despite key innovations in GoPro's product line, specifically the HERO9, with new features like voice control and live-streaming. Management has identified a willingness to upgrade amongst its loyal consumer base.Given the low upgrade rate, it is inferred that customers are unaware of newer features and related value.

Many investors have already written off GoPro as a failed experiment. Their stock valuation has skydived since it's IPO in 2014. The company has made numerous mistakes at both the strategic and operational level, and have caused the company to stagnate and fall in valuation.

However, the company may stage a comeback in the upcoming year on the back of it's new partnerships and the growth it's DTC business and subscription businesses. Is this the resurrection of the phoenix, or just the last flames of the dying ember? Here is why GoPro may be due for a come back.

Market Analysis:

GoPro is a company that manufactures action cameras and develops its own mobile apps and video-editing software. It was founded in California in 2002 by Nick Woodman and now the company is one of the major market leaders in action video cameras.The do it yourself action video market is dominated by GoPro for multiple reasons. The major reason is that the miniature, mountable high-definition video camera is not that diverse to begin with. As in, new companies trying to work their way up the market chain will find it difficult to attract new customers because the products will be very similar to those already created by the market leaders like GoPro. So new companies will have to think of alternative ways to reach out to their target market and people within that market.

Fast forward a few years, more successful competition arose as technology increased. This led to a market with GoPro involved in it with multiple companies pushing each other to think of new ways to stay on top. Within the market for durable, high-quality cameras exist recognizable market leaders, market challengers, market followers, and market nichers. Each group has an important role and share in the entire market as shown from the figure below.

As stated prior, GoPro in this industry/market is definitely a market leader. To add to this point, GoPro has shipped more than four million action cameras in 2019.The company invests a lot of money in research and development to produce new products as it strives to retain its leading position in the action camera market as shown in the picture below describing the expenditure in thousands of US dollars

An important part of a market leader is the being able hold your position on the top of that specific market. With other competitors like Garmin and Eastman Kodak entering the digital action-camera market, the concern for staying at the top of the market is one of GoPro's priorities. Due to the competition and setbacks, GoPro is trying to maintain its strong market share. With the action camera market growing at a compound annual growth rate (CAGR) of 11.24% for the next 10 years, GoPro is operating in a fierce competition with competitors and is heavily exposed to threats brought by technological advancements As a result of this alarming problem with the company's market status at stake, the millennials who are hungry for travelling and invested in social media provide the key ingredient for GoPro to retain its position as one of the top action cameras developers. This is because of what the “brand” means.

When you think of action sports, whether on TV or in everyday life, brands like GoPro and Red Bull seem to always be around the action. That's resulted in a loyal following, despite the competition. Proving this point, GoPro's U.S. market share of 21.5% in digital cameras/camcorders was up 80 points from the previous year and included three of the five best-selling products in the category. This increase in market share came despite better offers from competitors in the same industry.

Total action camera revenue is expected to continue to rise, some estimates say that it may get up to 10 billion by 2026.The company additionally spends hundreds of millions of dollars each year on its sales and marketing budget in the hopes of increasing its share of the overall market.

SWOT Analysis:

GoPro has a number of advantages. First of all is their strong R&D capabilities - GoPro invested a reported $142.9 million into R&D in 2019, which accounts for 12% of their revenue that year. This shows strong commitment and capabilities in innovation and product improvement. GoPro's innovative spirit was what led them to develop the first action camera in the world. Their brand name is strongly associated with their product and vice versa, giving them a strong brand equity and presence in the market. This comes from their hyperfocus on their particular niche, A large part of its product portfolio are supporting products for their main GoPro cameras, such as helmet mounts, handlebar mounts, memory cards and cases,... This builds even more onto their brand image. Back in 2015, they actually controlled 34.6% of the market share in the world-wide camcorder market.3 The GoPro ecosystem that the company provides is streamlined so that people can shoot videos and wirelessly stream them on the GoPro app, furthermore creating a seamless GoPro experience from start to finish.

However, GoPro is not without internal problems. High operating expenses, mediocre revenue, and lack of independent investors from the stock market means that GoPro is not very profitable, especially with their reported losses since 2016, resulting in a low cash flow. The lack of cash flow means that GoPro is not very secure in their finances, limiting their operational opportunities and profitability, especially in the eyes of investors, who would then have reservations about pumping money into GoPro, creating a vicious cycle. It's second flaw is, ironically, a result of its own excellence. GoPro's products are very future proof, with older models still satisfying customer needs years after purchase. Thus, existing customers have little reason to upgrade to newer models, which limit the market share that they can sell to. Due to the reasons above, they have had little choice cutting back on R&D expenses, reporting $142.9 million in 2019 for R&D, compared to $358.9 million in 2016, despite revenue consistency. Even though these cutbacks helped them recover from debilitating losses since 2016, it has and will also limit their innovation, making them less appealing for consumers. 2 What's more, the market niche that they have dug out for themselves is limiting them. With their product portfolio being as hyper focused on GoPro and its supporting products as it is, they do not have a large potential and accessible market, which gives them less operational flexibility than their larger competitors with their diverse products.

If GoPro is to grow as a company, they must find opportunities. Luckily for them, opportunities are abundant. The world economy has an upward growing trend, and as consumer dollars become more readily available, the potential market for GoPro also increases. People are also becoming more interested in action cameras, not just for actions, but for various purposes, such as an alternative for traditional, more bulky cameras for everyday uses, or just for the sheer novelty. This expanding global market provides ample opportunity for GoPro to gain market share and solve some of their aforementioned problems. Another potential market for GoPro is the increasing prevalence and normalization of VR technology and media. A market that they have already begun to wade in with their VR players and products. Alongside that, the growing demand for government bodycam, as well as everyday-use dashcam worldwide is also a potential market for GoPro to capitalize on, should they choose to branch out. These two market directions capitalize greatly on GoPro's strengths and expertise.

Competition is the biggest threat, even in their native action camera scene. There have been many emerging players in the action camera market, from established firms like Sony, Garmin, and Nikon, to more budget clones alternatives.These companies have been slowly but surely eroding GoPro's once-dominant grasp on the market share. Not only that, GoPro also faces cross-segment competition from traditional camera makers as well as mobile devices companies - many of which are also GoPro's active competitor, such as Sony. When it comes to pure image quality, GoPro faces the competition of traditional cameras and mobile devices, as ever increasing image quality from them deter a large portion of the market from seeing the need to buy a GoPro. Another threat that GoPro faces comes from legislators. As a tech company operating on a global scale, GoPro will need to navigate differing regulations across countries, in particular issues of environmental and data protection concerns. Regulatory bodies such as the EU imposes directives like the WEEE and the RoHS to address these concerns, and it will be costly for GoPro to navigate it, but even more so should it slip up. Any data and security breach could also lower customers' confidence in the company, as well as result in some nasty lawsuits, both of which are bad for GoPro.


Why the Future is (cautiously) Optimistic:

GoPro made a lot of mistakes in the past, but that doesn't mean the company is going to continue to fail in the future.

Over the last few years, it's management has streamlined its hardware/accessories business. It now sells only a few cameras at a premium price point and accessories/tools that go along with them like mounts, batteries, and cases. This focus has worked, with the average selling price of its cameras growing 13% in 2020 vs. 2019. GoPro is also rapidly transitioning to a DTC selling model. In the fourth quarter of 2020, 33% of GoPro's sales came from its DTC channel, GoPro.com, vs. only 12% in 2019. This should help GoPro improve its profitability and establish a more direct relationship with its customers.

While all those things are nice, the most important part of GoPro's future is its subscription service, called the GoPro subscription. The $50 a year service offers unlimited cloud storage, discounts at GoPro.com, free camera replacements, and access to its new editing app called Quik (consumers can also subscribe to Quik on their own for $10 a year). At the end of 2020, GoPro had 761,000 subscribers, up substantially from 311,000 a year ago.

The company's financials as a whole suffered in 2020, due to a decline in camera demand because of the pandemic (there's not much to film if all the sports events are cancelled and traveling is limited). However, when you consider that the average selling price, DTC revenue share, and subscriptions were all growing, GoPro's 2020 looks a lot better than the headline numbers suggest.

Why the future is still unclear for GoPro:

At a market cap of $1.85 billion, GoPro trades at a price-to-sales ratio (P/S) just slightly above 2, therefore it is still not profitable. However, if you look at the unit economics of a GoPro subscription, things start to look a lot rosier. Furthermore, the financial numbers for GoPro still paints a bleak picture. Looking at the company's 2020 financials, the numbers are negative across the board. Having a negative profit margin, operating margin, return on assets and return on equity, the company's financials still look unstable as well as unhealthy.

Conclusion:

Overall, it looks like GoPro's business is in a lot better shape than a few years ago. Investors should still stay cautious, as the company needs to prove there is a large enough market for its new subscription offering. They should also be careful of the company's financials, as it still remains in bad shape. But if GoPro is successful in building out its new hardware/software ecosystem while also transitioning to a DTC model, we may see GoPro's return to the original price evaluation. We should keep a close eye on GoPro during this upcoming year.

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GPRO

GoPro, Inc.

5.71

0.15
2.70%

Return

-47.08%
Change % Since Posting
-5.08
Change Since Posting
10.79
Price When Posted

Metrics

14.21
Target Price
6/ 10
Confidence
6-12 Months
Timeframe
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