- The high-growth rate of the subscriber base continues to be an incremental positive for the company's gross margins.
- Even though churn rates are not publicly available, we can make a reasonable expectation for the success of the $49.99/year subscription by performing a cost-and-benefit analysis; the results are encouraging.
- The company continues to offset stock-based compensations through the buy-back of outstanding shares.
GPRO's positive developments and the effectiveness of its new strategy are evident, supporting the strong buy rating.
Investment Thesis
Even though GoPro, Inc.$GoPro(GPRO)$ has shown considerable progress lately, the market waits for more validation before sending the stock to new highs. Despite being a bit early to declare it a winner, GPRO's relative valuation, along with an undergoing promising turnaround story, got my attention, and it's definitely worth closely tracking it.
The stock performance has been a disaster since its IPO in 2014, reporting 84% in losses since its inception. The GoPro story then made it a high-flying stock for a few years. However, reality has hit the stock hard, burning many investors who believed in the company. Almost a decade later, GoPro has built a valuable and recognizable brand across the globe, but its struggling financials have kept investors away for a long time.
Today, GPRO is in the right direction, undergoing a transformation that has already shown the first signs of improvement. While a conservative investor will seek more validations before jumping in, the direct-to-consumer (D2C) strategy, subscription business, improving margins, and the strong leadership team support the strong buy rating.
Strengthening Business model
In its early years, GoPro was seen as a strong growth story as its action cameras were in high demand, but over the past seven years, the company's revenue has continued to decline and has not been able to reach 2015 levels. In addition, GoPro has faced challenges as cheaper rivals entered the market, smartphone cameras improved, and its core customers did not upgrade their older cameras.
However, now GoPro is a different company from a few years ago. The company boasts better image quality, use cases, and a new subscription base. The subscription service continues to be a fast-growing segment of the company ending Q2 2022 with 1.91 million GoPro subscribers, an increase of 65% over the same period last year. In addition, the subscription service is the company's most profitable product, recording 70-80% gross margins. Hence a more extensive subscription base helps the company to scale fast and elevate its margin upwards.
Subscriptions Surpassed The 2M Mark
GoPro's subscriber base surpassed over 2 million in August as it continued on a solid growth momentum from Q2 2022. The subscriber count base has been almost 2X during the past 12 months, and it reflects a shift in the company's strategy as it continues to expand on its D2C business and shift the camera product mix to the high-end.
The subscription service was initially launched in 2016, but the only feature it offered at the time was cloud storage for the photographs and videos taken from the action camera. However, more recently, the company has continued to add on to the perks offered via the subscription service, including hefty discounts on purchases of products, unlimited cloud storage, premium editing tools in the Quik App, a private live streaming platform, and a guaranteed replacement of damaged-cameras.The subscribers pay an annual fee of $49.99 as a subscription fee, and the segment's 70-80% gross margins help elevate the company's gross margins. To that effect, the 2 million subscription service translates into annual recurring revenue of $100 million. I believe the company's subscribers will continue to grow going into 2023 due to the strong incentives to sign up.
Churn Rates Are Not A Big Concern For Now
GPRO has not yet published any churn or renewal rates so that we can infer how many subscribers canceled their subscriptions which is a strong indication of the long-term success of the service. However, by looking at Statista's references, we should expect a churn rate of around 20%, meaning that four out of five subscribers will renew.
Undoubtedly, the churn rate might be of limited use if viewed in isolation. For example, using the Lifetime-Value of customers along with the churn rate will provide insights for a meaningful sales forecast. Justifiably, some may argue that the reduced price (see offers below) creates a strong incentive to subscribe to save up now but cancel later, questioning the sustainability of the service.
More specifically, customers can save $150 and $250 by signing up for the 1-year subscription when buying the Hero 11 edition or Bundle pack, respectively. Regardless, GoPro's strategy is to lock in users in the subscription platform to familiarize themselves with the GoPro Quik app/desktop and create a habit so that they stick to the service for a longer term.Thus, a user cost-and-benefit analysis is the only way to predict the service's success. The annual renewal cost stands at $49.99 or $4.17 per month, and users get the following top features:
Unlimited Cloud Storage: GoPro provides peace of mind with unlimited storage in its cloud and offers a seamless upload process through its apps, compared to the other services you need to upload photos/videos manually. Indeed, customers that also use their smartphones and other cameras will opt-in for other cloud storage services with similar pricing since GoPro cloud is only for its devices.
Camera Replacement: The no-questions-asked camera replacement sounds like a great deal, but this kind of insurance might provide limited value as GoPro devices are ultra-durable. The replacement policy has restrictions, and some extra charges might apply. However, it still provides peace of mind to adventurous users.
Up to 50% Discounts: GoPro subscription discounts vary, and users usually buy accessories to level up their experiences. For instance, some of the most popular items are the shorty tripod, rechargeable batteries, semi-hard camera cases, and protective housing. The specific items attract a 20% discount (if you are a subscriber) for around $160 total, which implies savings of $32 for items that customers would buy either way.
In addition to the above, users get live streaming features through gopro.com's website that can be shared through a private link and premium editing tools. As a result, it is evident that a large portion of subscribers will enjoy a much higher value over the relevant monthly cost of $4.17, supporting the hypothesis that the service can be sustained and succeed on a longer horizon.
GoPro Introduces Three New Variations
GoPro recently released three variations of the flagship GoPro Hero model. The Hero 11 Black, Creator Edition, and Mini on September 14. New cameras feature a larger sensor driving higher resolution and color depth, enhanced video stabilization, and the most expansive field of view. The flagship addresses the masses, while the Creator Edition addresses the Prosumer, Vloggers, and filmmakers. The Mini serves as a reminder of the old simplistic camera with no LCD screen in a compact form factor, but this time around, with specs on par with the flagship, setting up the camera for better success.
GoPro continues to improve on fundamental video functions. All the new cameras can shoot up to 5.3K, and users may record one shot on any of the three cameras, share it in the right ratio, and publish it to any of the three platforms- Alphabet's (GOOG) (GOOGL) YouTube, ByteDance's TikTok, or Meta Platforms' (META) Instagram. Average selling prices for the flagship remain similar to last year at $399 with the subscription.
Hero 11 Black Vs. DJI Osmo Action 3
The company's main rival, DJI, also released its action camera DJI Osmo Action 3, on the same day. The DJI Osmo Action 3 and GoPro Hero 11 Black are vying for leadership positions in the action camera market. However, in my view, the new Hero 11 black emerges as the undisputed leader regarding features and performance.
While the Hero 11 Black allows users to shoot at 5.3K resolution, the DJI Osmo Action 3 maxes out at 4K. The Hero 11 black also provides better features for slow-motion videos as it can capture 240 fps at 2.7k, whereas the Action 3 drops the resolution down to 1080p. In addition, the Hero 11 Black 1/1.9" sensors offer 1B+ colors in a 10-bit video, and it remains the only action camera to offer 10-bit color in its video recording to date.
Features targeting the same social media-related demographic are the 8:7 aspect ratio, which can be compatible with Tik Tok and Instagram's 9:16 shots, and the new HyperView for the widest field shot at a 16:9 aspect ratio; these are all the features that DJI currently lacks. Finally, the pricing is where the Osmo Action 3 is slightly better, as the DJI Osmo Action 3 starts at $329. At the same time, the Hero 11 Black is available globally today at $399.98 for GoPro Subscribers and $499.99 MSRP.
Reviews of the new models
The new HERO11 Black Cameras reviews are generally positive, particularly on the taller sensor and ability to export most aspect ratios (particularly for TikTok and Instagram, etc.). In addition, the auto highlight feature simplifies the user experience and drives continued momentum and strong retention of the subscriber base. However, some reviews from users have stated that the upgrades might not be enough to entice a Hero 10 user to upgrade.
SBC Concerns Are Eased Through Buybacks
GoPro continues to reward employees with stock-based compensation (SBC), which creates a risk of dilution for its shareholders. The company's SBC was at a high in 2015, when it reached $81 million. However, as of late, the company has been generating enough cash flow to offset the dilution with a repurchase of the outstanding stock.
In Q2 2022, GPRO SBC stood at $10.25 million for the quarter, but a buyback of $11.76 million more than countered the dilution. Moreover, in the first half of 2022, GoPro's SBC reached at $20.08 million, and the company repurchased common stock with $21.76 million. Hence, it is reasonable to argue that the risk of dilution through SBC to existing shareholders is minimal at the moment.
Higher Rating Signal Employee Satisfaction
What caught my attention is the significant improvement in Glassdoor's CEO approval ratings, which reached 87% from the relatively low level of 59% seven months ago, suggesting improving internal sentiment. Additionally, the CEO, Nicholas Woodman, has skin in the game with around 16% ownership in the company, indicating a strong alignment of shareholders' interests.
Even though the rest of the leadership team has less vested interest than the CEO, the renewed board composition since 2016 has proved its capability, and the efforts have produced meaningful results. For example, Brian McGee, who has nearly seven-years of experience with the firm, has brought to the table invaluable operational experience. As a result, almost three years after he became the COO, and GPRO is much leaner operationally, with operational metrics all improving.
Conclusion
Although a challenging macro environment continues to loom over the company's margins and camera unit sales forecasts, nevertheless, I am encouraged by the continued subscriber growth with a strategic shift to annual upfront payments that drive better cash flow growth.
Finally, GPRO is trading at a steep discount of around 2x P/E ratio compared to its peers and historical average. Therefore, I expect GPRO to be a good-performing value stock at these levels and primed to provide reasonable returns to shareholders in the medium term.
https://seekingalpha.com/article/4545268-gopro-a-transformational-play
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