GoPro Inc (NASDAQ: GPRO) Shows Signs Of Risk

On Thursday of last week, GoPro Inc (NASDAQ: GPRO) released its second quarter earnings report, its first quarterly earnings report since releasing its IPO in late June of 2014.

The camera company posted a large GAAP loss, which, to no surprise, is because of costs that are related to the company’s public offering. The outlook that analysts have for GoPro’s third quarter seems fair. However the company’s current valuation carries a significant amount of risk, considering the fact that the company is dependent on essentially one product and central staff.

GoPro’s Second Quarter Report

GoPro reported revenues of $244.6 million, which is a 38.1% increase from just one year ago. Sales grew by 3.8% on a sequential basis. Despite the conservative sequential growth, the company’s revenues beat out consensus estimates of $238 million.

While the company’s products are extremely popular and the company has been experiencing rapid growth, the company still posted a GAAP loss of $19.8 million. Compare this number to a much more conservative loss of $5.1 million one year ago and $8.5 in earnings in the first quarter.

In the company’s press release, GoPro enthusiastically uses its non-GAAP earnings metrics. Under these measurements, GoPro posted $11.8 million in earnings, which translates to $0.08 a share for the quarter. This exceeded consensus estimates of analysts, which was $0.06 a share.

The Second Quarter

The company reported 42.1% gross margins for the quarter, which was an increase of 120 basis points from the first quarter. Compared to last year, margins grew 10%.

GoPro posted operating losses of 6.8% of sales, which is worse than the operating earnings in the first quarter of 7.0%. The huge increase in operating costs is due to administrative and general expenses. These costs were only $9.9 million in the first quarter, and swelled to $41.2 million by the end of the second quarter. A large portion of these costs, however, are related to expenses regarding the company’s public offering on the stock market.

Future Quarters

For the third quarter, GoPro plans to bring in revenue around the $255 to $265 million range, which means a growth of 6.3% on a sequential basis at the midpoint of the guidance range.

If we assume that the company will keep with similar gross margins as the second quarter, gross profits could hit $109 million. The company’s chief financial officer, Lazaar, estimated that operating expenses would drop down to around $92.5 to $95 million. This means that operating earnings could reach $15 million, and lead to $0.06 to $0.08 per share in GAAP earnings.

GoPro’s Valuation

As of today, GoPro has approximately $105 million in cash funds and equivalents. It total debt is just under $108 million, thus putting the company at a flat net cash situation. Additionally, the company has $77 million in outstanding convertible preferred stock.

It is also important to note that the $201 million in cash that the company raised from its initial public offering were received at the end of this quarter, and are not included in the figures above.

The company currently has almost 83 million outstanding shares, which are valued at $3.4 billion, and stocks traded at around $41 a share. When we consider the potential convertible preferred stock and its potential to dilute the company’s cash situation, its operating assets hold a $3.3 billion valuation.

What Comes After A Successful IPO?

GoPro’s initial public offerings was probably one of the most successful offerings this year. Its release was well timed and hyped up. Underwriters and the company sold their shares at the high end of the range of $21 to $24 in the preliminary offering range.

As a result, GoPro’s shares ended the its first day in public trading in the mid-$30’s. A few days later the stock price rose to nearly $50. Now, shares have settled down to a range of $40 to $50.

The shares are now currently trading at the low end of that range.

The Takeaway

GoPro’s cameras have certainly established themselves as a moving force in the industry. It’s cameras sell at a premium of up to $400 a camera – a considerable price tag given the deflation in prices of hardware and increasing quality of smartphone cameras.

It is for this reason that the company is determined to remake itself into a media company, and build a platform to share videos and differentiate itself from its competitors.

Nick Woodman, GoPro’s founder and CEO, highlights the company’s social media results and accomplishments. He stresses the company’s 2 million YouTube channel subscribers and its 200% growth rate in Youtube video views. GoPro has also taken other media intiatives, such as partnering with Microsoft (NASDAQ: MSFT) to feature a GoPro channel on the Xbox One.

The company has also shipped over 10 million units of cameras.

However, the company’s shares are mostly riding on the hype and excitement that has surrounded the brand since before the company released its IPO. If you step back and look carefully at the company’s structure, the company is essentially reliant on a narrow product category and one central group of staff. While this is not uncommon in a start up, the company’s valuation is grossly inflated. GoPro is essentially a hardware business that is transitioning to a media company, and provides little reward for the risk is entails.