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Article / 26 June 2014 at 8:40 GMT

IPO, Camera, Action! GoPro market debut fired up by selfie fad

Head of Equity Strategy / Saxo Bank
Denmark
  • GoPro to be priced at USD 24 a share
  • Company has diversified into content
  • Valuation cheap for long-term investors

By Peter Garnry

GoPro is listing today offering up to 20.47 million shares to the public at 24 per share. The company will raise USD 214 million in capital which will be used to repay debt and acquire new businesses. The valuation looks quite attractive given the underlying growth rate and there is room for EBITDA margin expansion as the content strategy is rolled out. The demand seems to be big for the shares, so for traders there is an opportunity to chase the stock higher on the first day of trading.

The camera company, and now content

GoPro was founded in 2004 based on the idea of people being able to record video of themselves surfing or doing bungee jumping. Today the company's waterproof cameras are sold online and in specialty shops and larger retailers for around USD 200-400. GoPro sold around 3.8 million cameras last year.

In the acknowledgement that cameras can quickly become a commodity business, even for a hot new brand as GoPro, management states in the IPO filing that it is pursuing a content strategy. GoPro is already distributing customer content through various social media sites such as Facebook, Twitter and YouTube. It is not generating any revenue yet on content but GoPro intends to achieve this by the end of this year.

GoPro

Rapids, Camera, Action! GoPro's cameras are ready for everything
Photo: company website

The offering

GoPro is offering 8.9 million new shares while existing shareholders are selling 8.9 million shares. The underwriters have an over-allotment option to acquire 2.67 million shares from existing shareholders. In total 20.47 million shares are being sold to the public. The pricing was set to USD 21-24 per share but it has been announced that the shares will be sold at USD 24 per share amid strong demand.

As 8.9 million new shares are issued at USD 24 per share, the company will raise USD 213.6 million before fees. GoPro says the proceeds will be used to repay term loans, general purposes and to acquire or invest in new businesses.

Financial results

GoPro has been growing at an extraordinary clip the last couple of years with revenue increasing to USD 966 million in the last 12 months up from USD 64.5 million in 2010 (see chart below). The number of employees have increased from 49 in 2010 to 718 as of March 2014.

GoPro revenue



















However, in Q1 2014 revenue declined 7.6 percent from a year ago and on the surface it looks like growth has stalled and the company is trying to cash out with an IPO. The explanation for the decline is more subtle. There was a delay of the HERO3 Black edition from Q4 2012 into Q1 2013 which ended up distorting the seasonality in the numbers. The underlying growth rate is still high but we will get back to that in our valuation section.

While revenue growth has been phenomenal, the EBITDA margin has been declining from 18 percent in 2010 to 9.7 percent in the last 12 months reflecting lower gross margins across its products and increased R&D expenses. R&D expenses increased to USD 28.7 million in Q1 2014 from USD 12 million a year ago. We believe, that GoPro over time can lift its EBITDA margin again but it not happen until revenue growth slows down materially. The shift to content could also expand operating margins over time as software generally has higher margins.

GoPro EBITDA margin




















Valuation

Based on total outstanding shares of 123,140,583 and an IPO price of USD 24 per share, the initial market value will be USD 2.96 billion. Immediately after the IPO, GoPro will have around USD 321 million in cash and USD 188 million in debt translating into an enterprise value of USD 2.82 billion.

Our assumption is that GoPro will grow revenue around 40 percent in 2014 to USD 1.38 billion and increase EBITDA margin to around 10.5 percent in an effort to please Wall Street which will translate into USD 145 million in EBITDA.

Based on above assumption GoPro is trading at 2014 EV/Sales of 2.0x and EV/EBITDA of 19.5x. As the company has no direct publicly listed competitors a peer analysis is useless. However, with the new content strategy the company is being sold as a future content and media company more than a camera company.

The S&P 500 Media index is currently trading at 2014 EV/Sales of 2.6x and EV/EBITDA of 9.41x so GoPro does not look that expensive. In fact given the underlying growth is as strong as we expect the valuation is outright cheap and attractive for long-term investors.

How to trade the IPO

For long-term investors the growth rate, margin expansion potential and valuation look very attractive. We are bullish long-term on GoPro.

For short-term traders the way to trade the IPO is buying the shares on the open with relatively tight trailing stops and try to chase the stock higher. Given the demand for the shares this IPO could very well get hot on open and especially because of the limited float and retail investors awareness driven by GoPro's consumer brand.

Peter Garnry is head of equity strategy at Saxo Bank. Click here for more of his articles.

-- Edited by Clare MacCarthy
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GoPro - IPO fact sheet

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