GoPro Stock is Only Worth $35.00 Per Share, Says Morgan Stanley
Morgan Stanley downgraded its GoPro, Inc. (NASDAQ:GPRO) rating on Wednesday, causing GPRO stock to nosedive to its lowest price since the durable camera manufacturer became a publicly-traded company.
The leading investment firm justified its move by pointing at slumping sales of the new Hero4 camera. (Source: GoPro Slides Closer to IPO Price, Wall Street Journal, October 7, 2015.) This pushed its GoPro target price down from $62.00 to $35.00 per share.
Is GoPro Stock Really Worth $35.00?
The crux of the issue, according to analysts at Morgan Stanley, is that GoPro has not made significant improvements to its video editing and sharing software. (Source: GoPro Reaches Low Since IPO After Morgan Stanley Cuts Target, Bloomberg, October 7, 2015.) Critics are underwhelmed by the company’s newest apps so far, as most of the features can already be found on smartphones. The concern here, according to Morgan Stanley, is that without a qualitative advantage to differentiate its software from smartphone video capabilities, GoPro runs the serious risk of becoming simply a niche alternative.
Market reactions to the report were swift; GPRO stock plunged more than seven percent to a low of $27.52 on Wednesday, flirting with its IPO price of $24.00 in June 2014. This latest drop compounds issues with the stock price, which has fallen by more than 65% in the last 12 months on the back of slumping sales and growing fear of competition.
Chart courtesy of www.StockCharts.com
But how well does this assessment by Morgan Stanley hold up to some serious scrutiny?
Not very well, as it turns out. Let’s turn to some of the arguments leveled against GoPro and see if they make sense.
While this may be somewhat true at the moment, it will likely change in the future. The majority of GoPro’s revenue stream is derived from camera sales, but the company has also embarked on an ambitious media-oriented strategy which aims to make money through user-created videos. GoPro in fact spent almost $120 million on marketing and sales in the first half of 2015, which represents a 41% increase from the same period in 2014. (Source: Shoot Video While Jumping At GoPro Inc (NASDAQ:GPRO) Boot Camp, InvestCorrectly, October 7, 2015.) You might be surprised to know that sales and marketing costs accounted for a greater portion of GoPro’s budget than research and development. (Source: GoPro Reaches Low Since IPO After Morgan Stanley Cuts Target, Bloomberg, October 7, 2015.)
Translation: we’re likely to see a lot of innovative new software features from GoPro.
But that’s not even the point, because the argument over lackluster software misses the main underlying value of GoPro.
That value is its very name.
There is an instant link made between GoPro’s name and its products. The company’s name is in fact now synonymous with durable cameras to the point where you don’t just want a rugged all-weather camera; you want a GoPro. This is an important part of consumer behavior which goes ignored surprisingly often by industry analysts, yet has been a critical element of success for many new companies.
Critics point out that GoPro has no competitive barrier to prevent rivals from directly competing with it, which will then slowly chip away at its market share and cause the company to fade into oblivion (Source: GoPro: Investing as an Extreme Sport, Barrons, last accessed October 7, 2015.) There have been many such companies that rose and fell, the most notable of which was the Canadian BlackBerry.
While this argument might hold water from a technical point of view, it really ignores consumers’ behavior. GoPro has an immensely high brand value as a manufacturer of high-status cameras, a fact which will play an important part in its future success.
Analysts feel that as GoPro gains popularity, other manufacturers such as Apple and Samsung will start to encroach on GPRO’s market share. (Source: GoPro Shares Continue Plunge, Wall Street Journal, September 11, 2015.) It does sound plausible, as GoPro is basically just another camera manufacturer, but it doesn’t stand up to common sense. The idea that smartphones such as the iPhone will steal GPRO market share is ignoring the main value of a GoPro. The company makes durable cameras, engineering them to be used in contexts inappropriate for smartphone use because of the risk of damage.
Here’s the Bottom Line on GoPro Stock
The main challenge for GoPro from here on will be how to maintain its brand value and justify itself as not just another one-hit wonder. GoPro has all the qualities of a successful company. If the camera manufacturer can better articulate its marketing strategy, maintain brand value, and carve out a larger and more unique niche, sales will rebound and the GPRO stock will likely make a serious comeback.