As seen from its recent earnings results, the turnaround with GoPro (GPRO) is clearly in motion. Yet is the wearable camera company’s comeback more than accounted for in its current stock price of around $10 per share?
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Yes and no. Over the past year, with the stock soaring by around 108%, investors have priced in heavily the upside from the shift to its business model. Yet given earnings projections for 2022, shares remain very cheap at today’s prices.
Assuming the turnaround continues, and the company continues to meet or beat expectations? There may be room for GPRO stock to make another 100% leap.
Even if the turnaround of its business fails to continue, downside risk from here may be minimal. Seemingly a situation where risk/return is favorable, expect investors to continue seeing this as a solid opportunity. (See GoPro stock charts on TipRanks)
Turnaround has Changed the Game for GPRO Stock
For years, GoPro experienced stagnant sales. It also saw either heavy operating losses, or at best, breakeven profitability. It turned that trend around in the past year, by pursuing a business strategy that not only has it back on the growth train. The company is seeing higher operating margins as well.
What changes has it made? First, the company began to prioritize the sale of its camera hardware via its own ecommerce platform. As a result, over the past year, the percentage of sales from its own site nearly doubled (to around 40%) between 2020 and 2021.
Secondly, GoPro has expanded into higher-margin areas, like subscription services. Admittedly, this part of the overall turnaround plan is still in its early stages. Based on the total subscriber numbers for its service (1.16 million), and the annual subscription fee ($50 per year), according to back-of-the-envelope estimates, subscriptions will generate about $58 million in sales, or just over 5% of projected sales for 2021 ($1.15 billion).
Yet, given its high-margins, and the fact it’s growing at a double-digit clip on a sequential basis, improved results will likely continue thanks to the subscription segment. Add in forthcoming upside from the turnaround, as seen in 2022 projections, and investors down the road may feel there’s enough justification to start paying $20 per share and above for GPRO stock.
Reasonably Priced Today, May Have Room to Hit $20 per Share
Even after its run-up over the past year, GoPro remains reasonably priced. How so? At today’s prices, the stock trades for a forward (based on 2021 estimates) price-to-earnings (P/E) ratio of around 13.3x.
Based on 2022 projections? Shares trade for 11.6x estimated earnings for that year. The low forward multiple may be a sign that investors are cautious about how the rest of its turnaround will play out. It may also signal that after it finishes bringing back up its profit margin, it has little room to further expand its profitability.
Yet, that doesn’t mean the stock may be done making big moves over the next twelve months. The company might be able to demonstrate not only that its earnings will climb in line with projections, but also show that its revenue growth won’t plateau after this year.
This stock could see tremendous upside, primarily from multiple expansion. If the above-mentioned “best case scenario” plays out, investors could go from pricing shares at 11.6x estimated 2022 earnings per share (EPS) of 87 cents, to pricing the stock at 15x or even 20x the top end of estimates ($1.10). In other words, a move to between $16.50 and $22.20 for shares.
TipRanks’ Smart Score for GPRO Stock
GPRO stock has a TipRanks Smart Score of 8 out of 10 (Outperform). Analyst consensus currently rates it as a Hold, with a $12 per share price target. Sentiment for the stock among TipRanks’ Investors comes in as Very Negative. Blogger Opinions, however, come in at Bullish, News Sentiment is Neutral, and Technicals are Positive. Both Hedge Funds and GoPro Insiders have Decreased/Sold their positions in the past quarter.
Bottom Line: Expect Investors to Remain Bullish on this Turnaround Story
Another doubling of GoPro stock may be harder to pull off than it appears on paper. While the company is on its way to higher profits, low projected revenue growth (just 7.8% in 2022) may limit its ability to either further grow its earnings, or to convince investors to give its shares a higher forward multiple.
Yet given that downside risk is minimal (due to the stock’s low valuation), investors looking for a turnaround play with high potential to gain may still consider GPRO stock a solid opportunity.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
