Model Updates & Takeaways From the GoPro Call
Author: John Moschella CFA, CPA Published: February 3, 2016 at 6:00pm Category: Earnings Review
We have updated our GoPro Inc (NASDAQ:GPRO) Earnings & Valuation Model to include today’s results and management’s latest guidance. Here are a few of the items we considered in our model updates:
1) The Headline the Call: Management challenged recent reports that the company was reaching the limit of its Total Addressable Market (TAM), and that competitive pressures were driving the poor performance. Instead management offered the conclusion that the recent slowdown was due to the fact that GoPro cameras are not easy enough to use for sharing content. As a result, the company will be investing heavily in 2016 in an effort to launch a new software (GoPro for Desktop) to improve offload, access, and editing.
2) Revenue/ASP: Average selling price was well below expectations in the fourth quarter. The discontinuation of some of the lower tier Hero models in April, and launch of the Karma drone in the first half of 2016 should help improve average shipment prices later in the year. In our model we brought the 1Q16 ASP down to $218 and increased it sequentially to $255 in 4Q16. We then adjusted the growth rates to meet the mid-point of the revenue guidance for 1Q16 and full year.
3) Gross Margin: We brought gross margin for 1Q16 down in-line with management’s guidance and then increased it for the next three quarters and brought Q4 back up to 43%. This assumption will require execution on the new software and other product improvements discussed on today’s call, and assumes a launch in time for the holiday selling season.
4) Operating Expenses: We brought opex up to management’s guidance, which creates a dislocation with historic results given the lower revenue base. We then brought each opex line item back down (as a percentage of revenue) through ought the year, and ensured a sequential increase each quarter on a dollar basis as management reiterated this point twice on the call. In general, we tilted our opex assumptions toward R&D and away from G&A. This recognizes the investment needed for the new advancements and the offsetting reduction in head count.
5) Taxes: We adjusted the tax rate for 2016 to give a slight benefit for operating losses.
Impact on Earnings & Valuation:
Our resulting Next-Twelve Month (NTM) non-GAAP EPS estimate is a loss of ($1.41), which would make our 2016 PE multiple meaningless. Instead we recalculated the 2017 PE ratio using the consensus EPS estimate prior to the release at 15x (excluding cash). Our 12-month price target based on a 50%/50% weighting of our market multiple/Discounted Cash Flow (DCF) valuation approaches moved from $16 to $10.25.
Our DCF valuation is based on a Beta, Equity Risk Premium (ERP), and WACC of 0.84, 6.5%, and 6.5% respectively. Our multiple and primary DCF inputs were held constant with our estimates published in our model prior to today’s release.Our updated GoPro model including today’s results has been published on our model page. Feel free to download it and plug in your own estimates.
Sources: Company reports, SEC filings, and investor presentations.
1) The Headline the Call: Management challenged recent reports that the company was reaching the limit of its Total Addressable Market (TAM), and that competitive pressures were driving the poor performance. Instead management offered the conclusion that the recent slowdown was due to the fact that GoPro cameras are not easy enough to use for sharing content. As a result, the company will be investing heavily in 2016 in an effort to launch a new software (GoPro for Desktop) to improve offload, access, and editing.
2) Revenue/ASP: Average selling price was well below expectations in the fourth quarter. The discontinuation of some of the lower tier Hero models in April, and launch of the Karma drone in the first half of 2016 should help improve average shipment prices later in the year. In our model we brought the 1Q16 ASP down to $218 and increased it sequentially to $255 in 4Q16. We then adjusted the growth rates to meet the mid-point of the revenue guidance for 1Q16 and full year.
3) Gross Margin: We brought gross margin for 1Q16 down in-line with management’s guidance and then increased it for the next three quarters and brought Q4 back up to 43%. This assumption will require execution on the new software and other product improvements discussed on today’s call, and assumes a launch in time for the holiday selling season.
4) Operating Expenses: We brought opex up to management’s guidance, which creates a dislocation with historic results given the lower revenue base. We then brought each opex line item back down (as a percentage of revenue) through ought the year, and ensured a sequential increase each quarter on a dollar basis as management reiterated this point twice on the call. In general, we tilted our opex assumptions toward R&D and away from G&A. This recognizes the investment needed for the new advancements and the offsetting reduction in head count.
5) Taxes: We adjusted the tax rate for 2016 to give a slight benefit for operating losses.
Impact on Earnings & Valuation:
Our resulting Next-Twelve Month (NTM) non-GAAP EPS estimate is a loss of ($1.41), which would make our 2016 PE multiple meaningless. Instead we recalculated the 2017 PE ratio using the consensus EPS estimate prior to the release at 15x (excluding cash). Our 12-month price target based on a 50%/50% weighting of our market multiple/Discounted Cash Flow (DCF) valuation approaches moved from $16 to $10.25.
Our DCF valuation is based on a Beta, Equity Risk Premium (ERP), and WACC of 0.84, 6.5%, and 6.5% respectively. Our multiple and primary DCF inputs were held constant with our estimates published in our model prior to today’s release.Our updated GoPro model including today’s results has been published on our model page. Feel free to download it and plug in your own estimates.
Sources: Company reports, SEC filings, and investor presentations.
