GoPro

GoPro is a company that develops, manufactures and markets action videos cameras. It is the industry leader of this market.

On June 25 2014, GoPro went IPO at $24/share. As of October 1 2014, GoPro trades at $91.80/share. At $91.80/share, I believe that GoPro is extremely overvalued. For a company that operates in a a highly competitive industry with deep pocketed competitors and slowing growth, a valuation multiple of 10x LTM P/S and >100x LTM EV/EBITDA is far too excessive.

In this analysis, I will be using relative valuation to GoPro's competitors. GoPro's closest competitors are Nikon, Canon and Olympus, with Nikon being the closest comparable. The data shown in the following table comes from the the respective companies camera segment.

While GoPro has robust revenue growth, unlike its competitors, one can see that revenue growth has been slowing down dramatically. In addition, from the data, it does not seem that GoPro has any exceptional margins on its products. In fact, relative to comparables, GoPro has one of the weakest margins in the industry. This make sense to me as the demographics that GoPro appeals to does not seem to have high purchasing power. 

On a positive note, the company has lower CAPEX margins than comparables. In order to adjust for this, I believe an (EBITDA - CAPEX) margin would be more appropriate. 

However, even with the adjustments, GoPro still has one of the weakest margins in the industry. 

If one is to be given a scenario where you have a company that has half the EBITDA-CAPEX of its closest comparable, and has a slowing growth rate, albeit not to the point of negative growth rate as it is with the comparable but likely a convergence , I would expect the company to have similar multiples. 

Nope. 

GoPro trades at 18x Nikon, its closest comparable, EV/EBIT and 25x Nikon EV/EBITDA. In my opinion, such a valuation is beyond absurd and shorting this company should provide significant alpha. 

Even if one adjusts EBIT and EBITDA for higher margins. The company still remains wildly overvalued. 

Using the highest EBIT and EBITDA margin of GoPro and all of its competitors in the last 6 years, the MAX EV/EBIT and MAX EV/EBITDA goes to 60.3x and 56.0x respectively. What a valuation. 

So what is the right price? 

With the bull case valuation of $13.27 and a base case valuation of $4.42 on a EBIT basis, I believe that GoPro is an attractive risk/reward situation.