GoPro ($GPRO): An ‘Epicenter’ Stock With Reasonably Priced Growth and Motivated Management

Breaking Bad, created by Vince Gilligan,  is considered one of the most successful and critically acclaimed shows in television history. While the show undoubtedly has an unorthodox and controversial subject matter, it is also an allegory for the challenges a business and its creators face from their enthusiastic, cumbersome, and chaotic start to the problems that accompany the growth and becoming more mature. A September 2013 Economist Article entitled The ‘Breaking Bad’ School cites several managerial travails explored in the show, “Mr. White’s subsequent career embraces both sides of entrepreneurial life: dramatic success and equally dramatic failure… but he then discovers that running a big business is rather different from launching a start-up.’

GoPro ($GPRO): An ‘Epicenter’ Stock With Reasonably Priced Growth and Motivated Management

Source: SeekingAlpha

While GoPro may currently be considered a joke to Wall Street (its precipitous decline half a decade ago was undoubtedly a bathtub moment), we think upon looking at the company and their fortuitous pivot as a result of COVID-19 that the joke will be on those who are short GPRO, while those who purchase GoPro are owning shares in a much leaner business that has hyper-improved operating leverage, a new and profitable SaaS/Hardware hybrid business model with much potential upside not accounted for in management guidance, and the real potential to create a meaningful software business to complement their respectable, although recently downtrodden hardware sales as a result of COVID-19. We see parallels in the allegories discussed in the show. We also think the recent years-long trend of GoPro being dead money is coming to an end.

GoPro ($GPRO): An ‘Epicenter’ Stock With Reasonably Priced Growth and Motivated Management

Source: SeekingAlpha

Two Origin-Stories of Necessity, Grit, and Epic Failure

Like the protagonists, CEO Nick Woodman has that certain unidentifiable entrepreneurial moxie. Instead of a Winnebago, the surfing-obsessed Woodman sold bead and shell belts from his VW bus and received money from family to pursue his business. The initial growth, like Walt and Jesse’s, was hard-fought and ‘built with his hands’ as well as impressive; in the company’s first year it sold $150,000 worth of products, in 2006 it generated $800,000, and the following year their sales quadrupled to about three and a half million.

This initial growth was fueled by obsessive concentration on building a superior and desired product.  The company appears to be regaining its stride in the growth of lucrative, margin-expanding subscriptions to its software, which appears to be highly desired as well. Their subscribers in their year-end report were up 145% a year of year and 52% sequentially. This makes us think the stock is GARP-ey. Like many ‘Epicenter’ names, we think GoPro and the social element of its core user community and the underlying activities associated with the use of the product will be one of the areas that booms in the coming re-opening.

 Woodman’s company was built on the desire to capture high-quality surfing footage. GoPro is a euphemism for ‘going pro’ because, in the 1990s, the only way to get up-close, high-quality footage of you surfing was literally to become a professional surfer. They build a high-quality product that consumers love, you can even drop them from space, and they’ll come out unscathed.  

Like our protagonists also, Woodman’s obsessiveness to achieving a great and uncompromised product shows the passion and dedication that we believe is at least not an impediment to managerial success, and at best, a pillar of it. Consumer reviews of the company’s core product are consistently positive and a dedicated core group of repeat users exist for the brand’s offerings. For a stock associated with being all ‘hype’ and ‘fad,’ it certainly continues to have durable Google Search traffic, which is also concentrated for obvious reasons in leisure destinations that will soon be swollen with eager consumers looking to document their first post-hell vacation.

GoPro ($GPRO): An ‘Epicenter’ Stock With Reasonably Priced Growth and Motivated Management

Source: Google Trends on ‘GoPro’, 12 months

GoPro ($GPRO): An ‘Epicenter’ Stock With Reasonably Priced Growth and Motivated Management

Source: GoogleTrends Interest by sub-region, and 30 day interest for “GoPro”

Revenues, even with COVID-19 interruption, show this. They were consistent prior to COVID. While some investors may have remaining lingering feelings of the doubt after their drop from a high of $90, we would point out that one of the crippling things was the relationship with distributors, who, of course, took a piece the ate into margins. Like cruise lines and casinos, GoPro has a highly engaged core customer base that loves the brand and will undoubtedly re-engage with it in a big way as re-opening progresses.

It’s a quality purchase, and those who buy it generally pick the brand and make a highly researched and informed purchase; this wasn’t ever a spontaneous ‘window-shopping’ purchase. So, when retailers shut down due to COVID-19, what looked like a potential death sentence for the company became its’ saving grace. When Walter and Jesse go into business for themselves after eradicating their arch-enemy and former employer, Gustavo Fring, a fearsome drug dealer, they are shocked at how expensive it is to have a distribution ring. While the unrestrained kinetic competition displayed in Breaking Bad may seem a hyperbolic analog, being in direct competition with Apple is perhaps the closest thing to it in the corporate world. In this light, GoPro’s survival in the face of the rise of smart-phone and its current re-invention is all the more impressive. It makes the excoriating it has received from the street seem more like an opportunity than a good view informed by fundamentals. GoPro’s Gross Profit Margin is number two with a bullet compared to peers!

GoPro ($GPRO): An ‘Epicenter’ Stock With Reasonably Priced Growth and Motivated Management

Source: SeekingAlpha

When Jesse and Walt are the bosses they are shocked to see how little of the profits they get as they have to divvy it up amongst the extensive pieces of the distribution chain their previous employer had managed methodically. This sets off Walter’s quest to emulate management methods of his former competition and get very ruthless about eliminating these costs.

 GoPro’s management has done the same. They have aggressively cut costs, boosted operating leverage to record levels, and added to their subscription model’s viability by bundling it in with a purchase of their most popular products. Like Walter White, they have found D2C is more profitable and eliminates many headaches! Is there margin expanding? Yes. Could demand surprise to the upside?

GoPro has also cut out many of the distributors, as Mr. White did, and gone to a Direct-to-Consumer model that virtuously promoted their subscriptions, which are also margin expanding. Yes, you’re starting to see now right? So, multiple positive forces are being exerted on margins. If the company has continued success with its software-subscription model, which is looking good in churn rates so far, its multiple should re-rate higher in addition to the coming boon of FCF.

High-profile failures and the lessons they teach are underrated. Ask Winston Churchill, Steve Jobs, or Ulysses S. Grant. You get the point. We don’t want to belabor something that may seem like an old adage, but the stories of these larger-than-life figures prove that for great success, high-profile failure is indeed sometimes a necessary prerequisite.

GoPro’s Business Will Benefit From Psychological Shift, And Consumer Wallet Shift to Opening

GoPro ($GPRO): An ‘Epicenter’ Stock With Reasonably Priced Growth and Motivated Management

Source: Fundstrat

As we move on from a year of being at home, watching Netflix, and engaging with our digital life to the analog, real world that we all yearn for and the re-engagement with the experiential economy—and side of life, we think GoPro is a flagship archetype for the broader ‘Epicenter’ narrative that also contains exciting prospects for growth that we believe are very underappreciated by the market.

Also, in a sign that this management—which certainly and undeniably had a high-profile Wall Street failure after a very publicized and precipitous fall that emblemized the name as the ultimate example of a ‘one-trick pony that overpromised and underdelivered—has learned its’ lesson in the school of hard knocks, most of the upside is entirely outside of the scope of the tight and impressive guidance that management has recently given. It looks like someone learned the old trick of under promising and overdelivering after a very public failure with the alternative.

We want to put GoPro’s dramatic and epic failure about half a decade ago into a different light through a popular TV Show that was likely a stalwart go-to of many of our viewers during this last year’s pandemic-induced isolation. This is, in a way our ode to the COVID-19 dominated world and moving on to the Great Reopening. Some of the best of Netflix’s content helps us understand a hated name in a new light. Only in 2021.

 GoPro’s critics always said that the company was a consumer electronics company with one product; the product was always considered good—even freakishly good, the monetization was always the problem. The excessive valuations were based partially on potential for alternative revenue streams. It’s pretty undeniable these have now materialized. 91% of the company’s revenue comes from high-cost models. Forays away from the company’s expertise and failed expeditions into areas like drones have given the company the type of scarlet letter that always piques our interest from a contrarian investing perspective.

Will GoPro Become The One Who Knocks—Competitively Speaking? It’s Possible.

We are convinced in the viability of management’s strategy after taking a close look. The core product and the comeback in demand will likely receive enough reason to own this dejected name. But it also has a scalable cloud-based app that will help solve the universal problem of managing content (and has gross margins of around 70% in this area), right at a time where the content we are producing will have heightened value for consumers. It’s a once-in-lifetime re-engagement we are approaching.

While their current projections for margin expansion and sales are impressive, we do think their software-play may hit a home run as it converges with a unique moment in human history. There are a lot of potential synergies with AR as well. We are all excited to get out there into the world, even if we aren’t necessarily jumping off a mountain in a wingsuit. We all will want to document our re-engagement with the best parts of life; it’s natural to do so.

GoPro ($GPRO): An ‘Epicenter’ Stock With Reasonably Priced Growth and Motivated Management

Source: GoPro Q4/YE Report Supplemental Slides

Risks And Where We Could Be Wrong

CEO Nick Woodman wants to make the GoPro Ap the one you will use over Apple’s clunky camera roll to streamline and utilize all the new content generated in a better and more emotionally satisfying way. This is a big goal, and if they don’t make it, the stock is still worth owning as the subscription growth will likely continue to add significantly to earnings per share. However, we wouldn’t want to bet against the management team, and board Nick Woodman has assembled.  Ken Goldman was CFO of Yahoo and was on FASB (which shows), they have a former Facebook exec and Consumer Technology Association advisory member. They also have the former CEO of Tinder on their board, a guy who knows a thing or two about making software that catches on. They have digital media expertise and several CBS alumni as well. There’s a lot right going on at this company, and we see this hated stock as a tremendous re-opening play with exposure to a potential home-run business model pivot in response to COVID-19.

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