GoPro Inc (NASDAQ:GPRO)’s Experiential Consumption

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By Mark Michaels on August 27, 2014 Company, Technology & Software

After disrupting the camera market over the past few years, GoPro Inc (NASDAQ:GPRO) released its initial public offering with much fanfare, selling 17.8 million shares for $24 a share a few months ago earlier this summer. However, many skeptics of the company have risen on the basis of rising competition and the lack of a clearly defined plan to turn user-generated footage into dollars. The company needs a strong foundation built upon understanding of key forces that influence the demand for action cameras and the company’s strategic business plan initiatives.

To some degree, the fear that some investors have of increasing competition and doubt regarding the company’s transition to a media company are unsubstantiated. If we carefully analyze the direction of the company’s business strategy, we can see that GoPro has taken careful measures to explain how these moves will yield significant growth. By trying to expand beyond the base of its current customers, GoPro has generated additional demand for its products by encouraging sport enthusiasts to get into adventure sports, and found a central commonality to unite its mass of potential customers. Its non customers avoided adventure sports because of the difficulty and risk associated with it. GoPro understood this concern and used this insight to create demand for its brand. The result was a miniature technologically advanced and multifunctional camera with the ability to capture footage from a hands free point of view perspective. By creating an incentive for professional athletes to record their experience, the company is now driving everyday consumers to attach a GoPro to themselves and capture their life experiences in a unique way.

Achieving Success As A Media Company

Supplementing consumer engagement with the company that makes the experience complete and unforgettable will have a longer and more resonating effect on consumers than any advertising campaign. GoPro provides fuel to a dormant desire in consumers who seek a larger dose of excitement and adrenaline in their lives, and were looking into extreme sports and adventure activities. The company has completely redefined society’s interest in extreme sports. It doesn’t matter where you go these days – in the mountains of Vail or in the scuba diving oceans of Hawaii, there is bound to be a GoPro. Young consumers don’t film their activities – they GoPro them, by strapping onto their helmets, surfboards, and handlebars the $200 to $400 cameras.

Investors must understand the growth prospects for GoPro, and to do that they must understand the trend for experiential consumption. Experiential consumption is reshaping consumer behavior – consumers react against sedentary lifestyles and are engaging more in sports and outdoor activities, obstacle courses like the Tough Mudder are growing in popularity and signify a rising trend towards fitness.

Footage of these activities have been propagated by video sharing sites and are also motivating novice participants to take part and providing a form of instruction as well. The company is also providing incentives to professional athletes by giving them a portion of the advertising revenue earned from views of their GoPro footage content.

The unique content generated by users have the potential to become a platform unlike any others for advertisers to hone in on an accurate consumer segment. Rising interest in extreme sports are also pushing up the demand for sports equipment makers, such as surfboards, bikes, and swimsuits, which are an excellent way for these companies to expand their businesses. Additionally, these sports enthusiasts are a growing segment within the larger market for vitamins, dietary supplements, and sports drinks, which can support these companies broaden their reach to mainstream consumers.

GoPro’s most direct rival was Contour, a start up based in Seattle that manufactured cameras that was used in a similar way to GoPro’s products. After reporting a solid growth in its initial operating period, the company eventually fell to GoPro’s success and was closed down last year in 2013.

Sony (NYSE:SNE) is also a strong competitor through its wearable action camera line, but its devices do not have the pivoting lens feature that GoPro has, which allows the image to remain right side up. According to reviews online, GoPro seems to be the leader of the market, beating out its competitors with its quality, reliability, and versatility.

Business Basics

In 2013, by GoPro sold 4.1 million units and its sales made up 30.4 percent of the total market share in the video camera space. Sony, on the other hand, captured only 20.8 percent of the market with its No. 2 camera. In the action camera space, GoPro is the leader of the market with a total market share of 47.5 percent, while Sony trails behind at 6.5 percent.

In its quarterly earnings report for the second quarter, the company posted revenues of $244.6 million, which was an increase of 38 percent from the same time one year ago. This incredible growth in revenue is the result of the company’s outstanding management board, which helped boost demand for the Hero 3+ Black camera as well as accessory devices. GoPro experienced a 200 percent increase year over year in video views on its YouTube channel, which is the key driver of viewers and demand for products. The company’s non GAAP net income for the second quarter of the year was $11.8 million, or $0.08 a share. This is a huge improvement for the company from the same quarter in 2013, when the company posted a net loss of $3.2 million and shares worth $0.03 each. For the first half of the year in 2014, gross profit dollars grew by 36 percent, boosted by a revenue growth of 11% and a 2.5 percent drop in the cost of goods sold. The company’s operating costs increased by 70 percent, due to the increase investments in marketing, sales, and R&D. For the past year, the company had $112 million in cash from operations, but that figure was offset by $23 million in capital costs.

The results from monetizing user generated content remain unclear, which makes it difficult to determine the company’s discounted cash flow.