The last 10 years haven't been very good. go pro (GPRO 0.42%) Shareholders. After hitting a market cap of over $10 billion shortly after its initial public offering (IPO), GoPro stock has fallen 97% from its all-time high. This means that even if he invested $100 at the peak of the stock price, he now only has $3 left.
However, the company is still going strong. In fact, he has generated $1 billion in revenue over the past 12 months. GoPro went from being a popular technology stock to being ignored by most of the investment community. Could this be a great opportunity for deep value investors looking for undervalued stocks?
Growth in subscriber numbers stagnates and revenue declines
Before we get to the positives, let's set some expectations about GoPro. The company is struggling and has been stuck on the edge for years. The company sells cameras for outdoor and extreme sports enthusiasts that can capture high-quality video of activities such as snowboarding, snorkeling, and mountain biking. Most of the company's sales come from these hardware devices and related accessories.
After demand surged in the second half of the COVID-19 pandemic, revenue began to decline. Total revenue for the fourth quarter of 2023 was $295 million, down from $321 million in 2022 and $391 million in 2021. To stimulate demand, management lowered product prices and introduced his GoPro products to more retail stores. It is also spending more on sales and marketing.
All of this negatively impacted profitability, with gross margin declining to 34.4% in Q4 compared to 41.3% in 2021, and operating income of $2 million compared to $69 million in Q4 2021. decreased to
To diversify away from equipment sales, GoPro pushed add-on software subscriptions to smooth annual sales. The segment got off to a good start, going from 761,000 subscribers at the end of 2020 to 2.25 million at the end of 2022. But growth has since begun to slow, with subscriber numbers only slightly up from 2.5 million at the end of the third quarter. By the end of 2023, the number will reach 2,507,000.
This is a problem because GoPro's subscription business remains much smaller than its hardware division, with quarterly revenue of less than $25 million. Sure, that's high-margin revenue, but it's only about 10% of GoPro's average quarterly hardware sales. For GoPro to return to profitability, investors should expect subscription revenue growth to accelerate in the coming years.
Can acquisitions expand your customer base?
Despite these growth and profit struggles, GoPro management hasn't backed away from its expansion plans.
For example, the company recently acquired Forcite Helmet Systems, a manufacturer of technology-enabled motorcycle helmets. The acquisition makes sense because the extreme sports customers overlap, but integration will require sharp execution. Motorcycle helmets are outside of his GoPro expertise (cameras), so the company can tackle an entirely new market. For today's investors, this creates even more uncertainty. But it also adds some upside potential.
No matter what GoPro's growth strategy is, at the end of the day, what investors care about is revenue. That comes from consistent revenue growth, gross margin expansion, and subscriber growth. Nothing else matters when it comes to stock price performance.
GPRO Operating Margin (TTM) Data by YCharts
Valuing stocks is difficult
Valuing GoPro stock is not easy, as the company's profitability has fluctuated widely. It has a market capitalization of $391 million and net cash of $153 million, which accounts for its outstanding debt. This reduces the company's enterprise value to just $238 million. That's slightly more than double its 2021 profit of $113 million.
The problem is that GoPro is currently unprofitable, posting an operating loss of $75 million in 2023. If you're thinking of buying GoPro stock on the spur of the moment, you need to be confident that the company can return to profitability over the next few years. This will be driven by increased software subscriptions, higher gross margins, and stronger hardware sales. If the business continues to make losses, the stock price is likely to fall further.
Brett Schaefer has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
