GoPro has been on fire lately. In the past six months alone, the company’s stock price has rocketed 317%, reaching $2.26 per share. This run-up might have investors contemplating their next move.
Is now the time to buy GoPro, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think GoPro Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on GoPro for now. Here are three reasons why GPRO doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. GoPro struggled to consistently generate demand over the last five years as its sales dropped at a 3.9% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, GoPro’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
GoPro burned through $79.92 million of cash over the last year, and its $123.7 million of debt exceeds the $58.57 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the GoPro’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of GoPro until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
GoPro doesn’t pass our quality test. Following the recent rally, the stock trades at $2.26 per share (or a trailing 12-month price-to-sales ratio of 0.5×). The market typically values companies like GoPro based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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