5 Reasons Why GoPro Inc (NASDAQ:GPRO) is Overvalued

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By Hanson So on July 7, 2014 Technology & Software

Many people believe that GoPro Inc (NASDAQ:GPRO)’s high growth is only temporary and cannot sustain itself.

Update: Stock has risen 5% again today as of writing.

People believe that since the IPO, GoPro’s price is too high and the company has been over optimistically placed in the wrong category, valuing GoPro as a media company instead of a traditional brick and motor video device making company.

Inside selling indicates pessimism of valuation by management.

GoPro Inc (NASDAQ:GPRO) became an over-night sensation gaining 20-30% per day since the IPO day from $24.00 per share to a high of $49.90 before slumping after the media sensation has passed due to missed 1^st quarter earnings. Their extreme over valuation indicates the company could be in a bubble.

What does GoPro do?

GoPro Inc (NASDAQ:GPRO) produces specialized video cameras that allow athletes and extreme sport adventurers to record their activity. GoPro has stated in their IPO Prospectus they wish to be considered a media company as they plan to make entrance into that field. As a result they’ve been over optimistically valued as a media company by analysts and the market resulting in high unreasonable valuations. Investors are afraid to miss out of the action and thus feel the high valuations are justified. Some investors’ belief in the company’s success is attributed to the high rapid growth in GoPro’s social media reach.

Point #1: GoPro has not shown any signs to be a media company. Yet valuations of media companies are higher than the traditional brick and motor entertainment equipment manufacturer business, and GoPro has unjustifiably positioned themselves to be something they’re not yet.

Disappointing First Quarter Earnings

In addition to the unjustified categorization, GoPro had disappointing first quarter earnings. In the first quarter of 2014, revenues fell from $255 million to $236 million, when their valuation states they should be growing their earnings. EBIT was a mere $14.9 million compared to $33 million the quarter before. It’s clear the company’s growth is starting to see a decline which may accelerate further into the second and third quarter.

Point #2: First quarter earnings reveal decline in their overall revenue and EBIT which can worse in the coming quarters.

Declining Profit Margins

From 2011 to 2013, gross margin fell from 52% to 37% as more established competitors such as the Sony Action Cam started to enter the market. Since GoPro lacks any patents, the company’s margin could decline further as more competition enters the sports equipment market.

Point #3: Profit margin declines as new competition enter the industry due to lack of patent.

How Innovative Can They Be?

The chance that GoPro becomes an innovative equipment manufacturer and mainstream media company altogether would make it mature among the likes of Apple, Canon, Time Warner, Google, Microsoft. Yet those other companies have even lower Price to Earnings comparison. While most of the tech companies have a conservative price to earnings ratio of 15-20x, GoPro has a sky high valuation of 108x price to earnings. GoPro’s Price to Earnings multiplier even outpaces the industry captains.

Point #4: Price to Earnings too high especially compared to innovative industry leaders.

Investors May Look Elsewhere

Initially, investors are very interested by the company due to the high profit growth in the two prior years. Yet as soon as Q1 earnings came out, sentiment will shift rapidly as investors look for an exit. Quarter 2 Earnings will reveal the fate of the company. If revenues decline again, the company could become the next Polaroid.

CEO Woodman Nicholas sold $244 million worth of shares on the day of the IPO, which shows the lack of confidence he has in his company’s future growth prospect. If he was confident the price could go up further, he would be holding onto the stocks.

Point #5: Insider transaction reveals lack of confidence by Management.

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