Chit Chat Stocks - GoPro (GPRO) | Deep Dive

Episode Date: April 8, 2021

GoPro develops and markets action cameras and cloud-based subscription services. GoPro has had a rough run of it with the stock price almost hitting $100 after IPO and then falling to the single digits. Listen in as Ian, Brett, and Ryan dive into GoPro's history and its future growth opportunities. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:21) Industry | (7:04) Management & Ownership | (11:40) Valuation | (13:38) Earnings | (15:21) Balance Sheet | (16:57) Our Analysis | (20:24) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Thursday Deep Dive episode on Chit Chat Money. We're here with Ian Gray. As always, Ian, guys, it's Master's Week. I guess we're excited about that. That's

kind of what I've been thinking about for the intro. So, Ian, you got any room for anyone? I know Jordan Spieth is kind of the number one guy, but yeah. yeah i'm i'm kind of interested in seeing if jordan speed can keep it going here um got that win recently and uh i always like him playing i feel bad for him when he's he's had such a bad couple of years but i'd like to see him get back on top or if brooks kepka kepka came in and had something good too but i know the one guarantee i will make is i know that by the end of the masters i'll be dying to get back on the golf course and then we'll all be playing exactly like them but we're talking a company today as always is gopro a company that people have forgotten

about uh there's been a terrible ipo but they're trying to do a bit of a turnaround here so i'll let ryan introduce uh what the company is because i'm missing something sorry sales pitch sales oh oh right right we got to talk about that first uh i think it's your turn ryan okay well uh i don't of i mean we've talked about it here twice now but the wrecks are out and we've looked at a few recent ones to what to what is it seven investing i guess if you're not familiar we uh you can use our code ccn you get ten dollars off it's only seven dollars for the first month to our recurring listeners i know you hear us say this every week but these recent batch of wrecks have been pretty dang good and so wide ranging wide ranging and a few that we particularly particularly like here

So go ahead and use that code CCM. But without further ado, GoPro. So for anyone that's not familiar, I think most people know what GoPro is, even if you've never had one, it's kind of, at one point, it was like, sort of the pioneer in active cameras, like people were like, Oh, you know, how'd you get that vlog? It's like a GoPro. It wasn't really a verb, but you could, you know, it was kind of along the lines. um so they basically that's sort of their bread and butter is the active lifestyle cameras and they have the more traditional sort of wearables um so let's say you're vlogging or you're going on a hike or i don't know something active you can use that that's probably the kind of camera you use but then they also have a 360 degree camera um which i guess and it's waterproof i don't i'm trying to think of applicable stuff for that sometimes it's diving scuba diving scuba diving okay that's that's one and then kayaking sorry i can think of one okay and then they have subscriptions they have a mobile app as well they sell some adjacent

products like uh accessories so think like camera accessories like mounts um and you can bundle that with the cameras and then there's also lifestyle gear you may have seen someone wear a shirt that says gopro that kind of stuff that sort of apparel uh and then the manufacturing is largely outsourced to china so that's sort of the supply chain part um but the here's what the subscription includes if you're wondering like you know what do you get with the subscription they said as a subscriber if you damage your gopro we'll exchange it no questions asked as a subscriber you can automatically upload your footage to the cloud from your camera available on all cameras hero 5 and newer or through your mobile device or computer for easy access on any device access to all gopro

quick to edit and share your footage on the go you'll also get up to 50 off accessories at the gopro.com so they've sort of bundled a whole bunch of their features there into one and that's sort of their uh they label it as their subscription but it's really the diehard gopro fans are probably subscribing to this um and right now it's probably valuable enough and cheap enough for anyone that's buying like a new camera to do as well um but the company has had a rough go of it as brett said since coming public they're sort of pivoting now towards this instead of going for everyone focus on the niche and try to monetize that base a little better they're going a little more dtc now instead of traditional retail distribution places so and that's gopro.com

yeah and historically they've had they've had a lot of their sales come through target best buy walmart that kind of thing but now a lot of it is starting to come from gopro gopro.com and then i i don't know why i like to have this here but they have 758 employees and they're headquartered in san mateo california i feel like sometimes that helps people remember that it's yeah just business not a stock yeah just the size of the company and then if anyone's interested the stock peaked i believe its high in 2014 was 98 bucks and it's almost went below two dollars a share so really returns yeah right out of the gate it went up like 100 but after that just man that was tough yeah it's been it's been down for a while i mean it got into a pretty crowded market i'll get into the history

though gopro was founded by nick woodman in 2002 after a surfing trip to australia where he couldn't capture the moment because it required another photographer i'm gonna be honest i'm sure this went exactly like he said if i were to guess how gopro started that's exactly what i would have guessed or the story that they tell and then people say that all these stories are kind of probably but the uh woodman and his wife uh used to sell shell jewelry and belts out of a volkswagen van in california to save up enough money to build the gopro nice um so if you're picturing what i I bet you can picture exactly what Woodman looks like surfer did kind of, but it took him two years to develop the first camera and he showed it off at

trade shows and stuff like that. And it was originally designed to attach to a wrist. And they had pretty significant market share by 2012. They kind of pioneered the space of like active cameras sort of on the go footage, stuff like that. And that's probably why they have still so much brand recognition. I mean, even people that never use it, know about them. Um, the company raised $430 million in its 2014 IPO.

Um, it's down 60% now from its IPO, but the business. Um, for the last year, the stock, yeah, the stock's done really well. Um, but that's basically the history of it. Uh, do you want to talk about the industry competition and stuff like that? Yeah. And I guess before again, maybe I'll ask you a quick question. What are you guys, when you think of GoPro, what do you think? Because my thoughts are, all right, I never used one of these things, but I get that people would use them.

I mean, what happened in 2014 where this thing just came out at such a high valuation? I don't know. What was the hype? Well, it was sort of – I mean, it was like the – it was cool hardware at the time. And we've bought GoPro cameras. We used to do a little more complex YouTube stuff. We used to have nicer videos. And it's just sort of the brand. I don't know, like high quality, high quality, but not too expensive, decent camera. And that's kind of the one you think of to go to. But if it's not like production level, and I think the other part is phone camera quality has gotten good enough now that unless you really, really need a camera, you can use that as a supplement or a substitute.

Yeah. All right, Ian, what about you? Yeah, I think just to answer your question about why it was so hot coming out in 2014, I think part of it was it does the thing that all the hot brands do. And it says it was a lifestyle brand, right? That everyone just uses GoPros. And I know like when I was a kid, everybody got a GoPro. It's like, oh, wow, that's so cool. And you're just like making little videos with your friends who have GoPros or something or, you know, skateboarding down the hill or whatever it is like stupid stuff. but it just was like, it was trendy. Everybody wanted them. It was the thing that was like, uh, coming out. And I think, I think, and we'll get into this more later, but I think part of it too, was their huge social, um, followings and look at all these cool videos that people make. And everyone looks at the videos that go like GoPro has like the best marketing material, both for investors and for consumers that's made by its own product. Right. Right. Like Apple in some ways, I think Apple has kind of stolen it from GoPro about all the shot on iPhone,

commercials but like GoPro really kind of I would think kind of revolutionized and pioneered that where look at all these amazing videos that all these people have done doing these amazing things around the world using our camera and even though they're not like you know they're not responsible for those people doing all those amazing things they've made it possible to see and share those moments which just kind of creates a lot of viral marketing for them I think you know it also feels like vlogging like the youtube kind of being young at the time was very fun for like i mean my age demographic everyone wanted one because they all thought they were going to be youtube stars at the time yeah i guess that's a part of it too but now you can just do it the the phones

basically apple and samsung like the camera's just as good so that was probably the huge one there but i guess right and i would just add one more thing i think um i think there was a little bit of as an assumption that GoPros were going to be used for everything. And even, and I'll dive into this when we get into management, but like the CEO kind of thought, okay, we're going to broaden our market a lot here and like all the vlogging and all that type of stuff. And then I think it gets into it a little bit and they realize, oh, everyone's, you know, the phone cameras get better and better and everyone realizes, oh, we're going to use our phone cameras for most things. But then GoPro still has this kind of niche that they're trying to return to with more of the active

active camera uh market all right right well yeah i'm sure we'll talk about them in the second half too but i'll hit industry and landscape quickly competitors include and this is for cameras would be someone like nikon canon sony garmin stuff like that a lot of competitors there gopro's probably the number one in their niche um and a lot of those companies some of them have other subsidiaries but that camera division it's a bit of a commodity nowadays and the real competitors are apple Samsung, Google, LG, whoever the other ones are for smartphones. That was the big downfall over the last five years. Worldwide, the action camera market is pretty small at only $7.5 billion estimated globally. I think that was in 2019, 2020 numbers were probably a little lower just

because of the pandemic. And then the software market they're going after is kind of hard to quantify i mean i don't know i'm trying to it's something that's not really been built before because well there's been obviously video editing tools and stuff like that but that's a way larger market than gopro itself is going after at least currently maybe they can evolve to that over time either way um i think the market and the the addressable market although we joke about how that really doesn't matter i think it matters more than usual here at least with gopro yeah All right. Ian, yeah, management. Yep. So we've already talked about him, but Nick Woodman is still the CEO. He was the founder. As we've mentioned, just crazy volatility since they've

gone public, you know, up as high as, you know, 90 bucks a share, under $3 a share. It's now at about $12 a share. So crazy run. In some ways, it's a little impressive in my mind that he's still the CEO and that he's stuck around and is kind of part of this turnaround effort too. Like oftentimes it seems like something like that happens and then you get in a new CEO who does the turnaround and whether that's because other investors forced the CEO out or it's because the CEO just is, he's made his money and doesn't care anymore and moves on. But I just, I found that to be a little bit interesting that he's still around even, even despite all that. As far as ownership, He owns about 19% of the shares outstanding. So very substantial. And a big reason probably why he's still around. Vanguard and BlackRock are also major holders. They own 7% and 5% respectively. So some pretty solid institutional ownership there. But overall, there's only about 48% institutional ownership.

So if this turnaround were to be successful, I'd expect that number to get up and they'll probably get some more institutional ownership coming in and driving up the price a little bit. And then there's about 8% short interest. And I think historically, this has been a stock that has had higher short interest than that. But with the run up this year, I assume that the run up this year was partially a bit of a short squeeze as well.

But currently, there's not an alarming amount of shorting in this stock. Yeah, it seems like one of the, it could have been like in that GameStop group. I do think I read something about it getting short squeezed. Yeah, for sure. I mean, this was a favorite short name for years, and they did quite well. But maybe it wasn't 140%, or whatever. I'll get into valuation right now. Market cap's about $1.9 billion. I think as we're reporting, it was down today, so it's a little bit less now. Either way, it's a little less than $2 billion. Ticker's GPRO.

Enterprise value is similar. They do have some convertibles that I'm sure that Ian will talk about. But price to sales is 2.1. Price to gross profit is 6. And then price to operating cash flow and price to free cash flow looked really, really good in 2020. But that was a bit artificial, a huge bump from a, what was it? They had, I mean, all of the working capital numbers worked in their favor for operating cash flow. Accounts receivable went down, inventory went down, and accounts payable, or maybe that also went down. But either accounts receivable, that was a huge benefit for them. It's not really going to be sustainable. Yeah, part of that was intentional, the inventory drawdown. I mean, they've really, really talked about leading it up because it's a company that you don't want excessive inventory on the balance sheet because it's going to get written down.

But this was probably the biggest swing in working capital that they've ever had, and that really contributed to the cash flow. Yeah, I think they generated $200 million in operating cash flow. I mean, that was most of it. I would not expect that to be back. I think they're guiding for like $150 million in 2021. So that would put them on a priced operating cashflow of like 12.7. So pretty cheap if they execute in 2021, no dividend, 14 million options outstanding out of 151 million shares currently.

So a little bit of share dilution is coming if the stock price stays in this range and they got their convertible notes too, but I'll figure it over to Ryan. What about earnings? Yeah. So they had 892 million in revenue in 2020. That was down 25% year over year. COVID hurt them pretty bad initially, it sounds like, but their gross margin was about 35% for the year. The gap net loss was 67 million, but they had operating cash, they were operating

cashflow positive. And I've heard people twice now cite that $200 million. Oh, sorry. That was the second half of the year. Yeah. Okay. Yeah. They had 94 million in operating cashflow for the full year. But a lot of that did come from the positive change in working capital. They ended the year with 761,000 GoPro subscribers up 145% year over year. That's something they've really, really tried to pivot to. Um, and they talk a lot about it on the earnings calls and they've said churn is pretty low. I didn't have a figure for it. Um, but hopefully it's low. I mean, they touted the low churn on the conference call. And I can't imagine that the analysts would have, uh, it sounded like they were on board thinking it was low. So maybe I just haven't seen it here.

And the analysts typically have some of those third-party sources to this so they can confirm that. But all in all, it was a generally pretty good year. They've been just a leaner operation all around. They're operating a lot more efficiently. And so that's contributed to the profitability and obviously the turnaround in the stock as well. Yeah, because you look at that top line number, you're like, oof, bad. But then if you look kind of deeper, average selling price went up, the DTC percentage of revenue was a lot larger, and then the subscribers are huge as well. But we'll finish up the first half with Ian. I want to talk about balance sheet.

Yeah, real quickly, before I dive into the balance sheet, I just want to make one clarification. Nicholas Woodman owns about 69% of the total voting power for the stock as well, which partially explains why he's probably still stuck around. but he owns about 19 of the shares outstanding uh 69 of the voting power so um he's likely unless he decides to voluntarily leave he's likely going to be there for as long as he wants to basically i'm sure the boards maybe offered the idea yeah yeah that's crazy he i mean props to him for staying around and having the ability to stay around yeah the b shares can really give you that advantage but having that conviction to stay with your company while the stock price basically almost went to zero is i think that's you know you can't there's numbers i think a lot of people

would have tapped out they would have said hey you know not for me i'm i'm i can check out and i've got i've made my money and all in there yeah right exactly i do think yeah if your stock has dropped 99 and the ceo is there from the beginning to the end you could probably safely assume that he controls the voting yeah yeah yeah no that's a that's a fair bet to make for sure um diving into the balance sheet, though. They've got cash of $326 million, debt of $280 million. And there's a little bit, there's some leases in there, but most of that's convertibles, which have about a $10 strike price on both sets of convertibles, approximately. Looks to be, from the math I was doing, it looks to be around, assuming those convert sometime in the future, it looks to be

around 10% to 15% dilution. They have some capped calls, which basically, the simple thing is those offset some of the effects of the dilution um but uh you know so not crazy dilution it looks like probably a reasonable um reasonable agreements on convertibles it's not some of the crazy ones we've been looking at yeah but i was gonna say better than farfetch for sure right exactly um net cash so that leaves them in that cash position of about 46 million dollars so pretty pretty solid balance sheet not a crazy cash position like we've seen with some other things but if they can keep up the cashflow positive, um, trend, they should be okay. Uh, they, you were talking about some of the working capital needs, um, their days holding inventory spiked in the first half of the year,

which makes sense. They weren't selling any GoPros in the first half of the year because no one was going out and doing anything and, um, and no one was buying anything. And so they didn't, they didn't sell a lot of GoPros in the first half inventory spiked. Um, but then really came down in the second half of the year and they really hit some good numbers in terms of the day's uh inventory outstanding so or days of holding inventory and so um i think like ryan was mentioning going forward they're really going to try to uh keep that inventory number a little leaner just to especially as they transition to more d2c and um the uh um software business so uh the last thing i'll mention is they've got about 150 million dollars in goodwill which is a

you know a pretty good chunk of goodwill on the balance sheet but it's been on the balance sheet for like five or six years and hasn't been written down. So I would say it's probably unlikely that that's written down. It seems like that's a pretty steady fixture on the balance sheet. But overall, it looks like a reasonable balance sheet, nothing that's too alarming.

Yeah. All right. Well, that's going to end the first half and we'll get back to the second half, kind of go into the analysis, what we liked and what we didn't like. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. you'll get real-time alerts.

Oh, like this one. So you don't have to worry about malware. Or when your kid downloads a song from a shady link. And now all your computer can play is Red color, red color, where are you? All blocked. Thanks to advanced security

included with Cox Panoramic Wi-Fi. Advanced security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Welcome back. Next up will be competitive advantages. I'm going to say this one, when you go into it, if it's easy to find them, that can be a positive thing. With GoPro, I think it was a bit difficult, and that can be an indicator on the quality of the company, but I'll let Ian kick things off first.

Yeah, to piggyback on that comment, I think all of our competitive advantages are very interrelated as well, so I'll keep my one brief. But I think their history and expertise in the industry provides them a little bit of a competitive advantage. just knowing how to do these product rollouts. I was talking about the viral marketing earlier, and I think their knowledge of who to interact with, how to kind of create some of those campaigns, those types of things. Just being the innovator in this space,

being the first one there, they've got a lot of tacit knowledge that's kind of developed over time that I think gives them a little bit of an advantage. All right, Ryan. Yeah, I'm going to go niche as in that is their competitive advantage. and like you said i mean cameras are very it's a very fragmented market especially with people

using their phones as much as they do now but if you're looking for sort of an action type camera and you don't want to pay too much i think everyone you don't want it to break and you want to work in like rugged environments i think i think gopro has the brand recognition that people instantly go to it and so there is something there where they're well known enough uh to have to not have to spend as much on marketing yeah yeah or sales yeah i mean it's like it's small i guess that's mine too it's brand they put a decade into it with their niche market you know you you're gonna buy it you're gonna buy from them you're not gonna buy from sony nikon or whatever if you're going for the outdoors camera type deal i mean i know when i was doing

my hype a lot of people use gopros people are using gopros they're not using anything else they've been doing that for a decade though and they haven't made any money so it's like you know really who cares it's all about the software here which we'll talk about next but you know they put a decade into this so social channels have a lot of followers um don't take that take it with a grain of salt they got 10 million youtube subs whatever uh but you know peak viewership was like five to seven years ago i was looking all the videos they have on there that have a lot of views are like five to seven years old any current ones they don't really get any views so they do have there is a bit of a cult-like following uh for the people that are

like hardcore gopro addicts almost it feels a little bit like peloton in that way of people that uh don't say that don't make that comparison you'll get some people angry ryan yeah i guess but uh it uh people buy the shirts which was my mind but you know the people that like the peloton apparel they're sort of the big uh advocates for the product i think that it's sort of the same tendency with gopro users yeah and one thing gopro was trying to do that totally failed was i think it was 2014 maybe 2015 as they were trying to start a media division and they had and this might have been failure from the start the old skype ceo running it that don't know it failed they shut it down in 2016 um i don't i don't know they've had a lot of failures

they were trying to enter the drone market they were trying to enter the vr market um hopefully they've righted the ship but um all right uh future growth opportunities and gotta go first well speaking of making comparisons that may not be apt um i think gopro needs to do what apple has been so successful in doing and this isn't to say that gopro is going to be apple by any means But Apple has built such a network of devices between phones and computers and Apple TVs and all this type of stuff that then they can start selling services to throughout all of them and subscriptions and those types of things. And I think GoPro has a similar opportunity here to continue to push different types of subscriptions and be creative with the different types of add-on features they can do that go out to this existing network of devices that they have, because the device business

really hasn't been working for them. Whether it's been, you know, the new iterations of the cameras, yeah, they'll sell some cameras and that's good, but really what's going to drive, you know, profitability for them and cashflow is going to be this high margin subscription businesses. So I really see that as the future growth opportunity. And I'm not convinced that what they have now is going to be enough for it to be a great stock over time. And I think they need to continue, like you were talking about all the, all the test things

that they've done with drones or VR and all this type of stuff. Like I would like them to focus more and more on the software side of it and see what they can develop that's more app based or subscription based over the next couple of years. Yeah. and even it's just like if you're the ceo like where would you go to grow that's yeah like wearables maybe i mean garmin's been mildly successful apple's gonna crush it with that no way but that's my thing is like you know how do you expand from here um video i mean video editing seems like the best move yeah it seems like it's on the software side

my future growth opportunity is direct to consumer and making that sort of the primary part of the business, almost going at it like Yeti. Yeti has been very successful with their DTC. I mean, so has GoPro.com. Last year, DTC made up 12% of revenue. This year it made up 32%. I think COVID was probably a good catalyst for that as well, since less people were shopping in person. But going DTC helps GoPro reduce inventory. And it also helps when they have less inventory. They don't have to. So they've got all this production. And once you produce a new one, let's say you have the hero five and you produce the hero six target, it's going to sell that old inventory at a lower gross profit, um, which hurts you. And then you have all that

inventory. That's just not, I mean, it's just sitting idly. And so becoming leaner starts with going DTC. Um, and they've done that and they're going to keep doing it. And I mean, that's really what they're driving and they're trying to drive that home with investors um and honestly that's probably what's driven the bulk of the rise in stock price maybe maybe the subscription pivot as well but i think it's the 145 growth in the subscription but i don't know yeah yeah it's just i mean the operating cash flow i imagine a lot of that came from dtc because it allowed them to go leaner on the balance sheet maybe maybe i don't know the but one thing is that yeah it does help the gross margin for sure um and that's important because that 35 or what was it i don't know they

just need to raise that up on the hardware it's hard man it's tough though it's tough ian i think did you raise your hand do you have anything or no no okay uh yeah all right mine is the quick subscription so this is different than the gopro sub that ryan was describing earlier although if you are a gopro sub you get this for free uh it's two dollars a month or ten dollars a year and it offers like nice editing tools i know that if you have a phone you get this and like if you're on something like instagram or youtube you kind of have this as well but they're trying to basically own everything for their customers from like the filming all the way to well you're gonna post to your channel so obviously they're not going to disrupt youtube uh but if they can do

everything from there and then you know i don't know you gotta you gotta kind of think all right how many subscribers are they going to be able to get um can they raise prices with this because they're kind of going in with a low offering to try to get a bunch of people on it um i don't know i think this is a decent idea or what are your guys thoughts yeah i i think that was the first thing when i didn't i hadn't realized that they had a video editing software my first thought was they should buy or partner with adobe or something like that to edit videos because people are uploading it or downloading it to their computer and then the next step is editing uh obviously then i don't think they're ever going to be the distribution platform like

youtube or tiktok or something like that but right they kind of tried that and it failed right what was that going back 2015 2016 or so they were trying to do the media part yeah yeah just owning everything up until distribution uh for that niche that's that's really their bread and butter and that's their role and that's hopefully i mean that's the only thing i can think of for growth is really owning the software side yeah and then the subscription isn't it's like half software for these editing tools and it's half like a loyalty program so that's kind of a part of it too to get people to buy your hardware each year what are you guys thoughts on this though if they should go and i know it's not apples to apples but

should they have a roku mindset where you're going to have quality stuff you're basically going to sell your hardware at cost to get it to as many people as possible and then make all your money on this software so i'd like that if they have good software but that's my that's my question right now is I don't know that they've proven that they can generate enough, um, enough income from these, these other services and the software and the subscriptions and all this type of stuff. Like if they can really make a clear picture that that is that they, if they can paint a clear picture of the consumer lifetime value and say, Hey, if we can get these people as part of our system, they're going to give us all this money over this course of time, then yeah, go for it.

I think that the selling it at cost makes sense, but I'm not sure that they're quite there yet in knowing what their customer lifetime value really is. They are almost doing that for subscribers in that the 50% off accessories and the free whatever returns or whatever that was. So, yeah, I do like that idea, assuming churn is insanely low for the subscription. if you if they have like 15 or like the retention rates only like in the 80 i would not do that yeah well then the business is broken anyways so then we're all screwed but the the yeah they said low churn it kind of reminds me of one of companies like yeah we're gonna go revenue in double digits it's like oh all right good range there uh but to give some numbers on what they say on their subscribers they say for every million subscribers that translates to 50 million

in revenue you know 50 a year times 1 million and they say that they get 25 operating or sorry 50 operating margin which would be 25 million so if they get 4 million subs that's 100 million in operating profit the only question is are there 4 million potential subs out there and that's i I don't know. Yeah, I'm not sure. Highlights and lowlights, Ian, what do you have? Yep. So I think the highlights for me start with obviously the software growth year over year has been impressive, but I also really liked the D to C transition that we've seen at 32 or 33% of the business now. They've got a valuable brand, but one thing I'll say is as I was looking at it, it kept popping in my head and I know people have been talking about this for years,

but it looks like a prime acquisition candidate, something that has that really valuable brand. The valuation isn't insane, at least in my opinion. Um, but they don't really seem to know how to execute. Um, at least they haven't over the last six years. So, you know, as an Apple shareholder, this would be a drop in the bucket of Apple's cash balance. I'd love to see Apple swoop in. Right. It's a week of cashflow. Exactly. So I'd love to see Apple just take a flyer on something like this so i think that's a highlight for me is that it does provide probably a floor for this stock um now people have been saying that for years and no one's ever actually bought it so i don't know if that's because no one's interested or if it's

if it's or if the founder doesn't want to sell or who knows what it is but i mean apple loves the video and camera part that's kind of their whole pitch or the number one pitch of the iphone is that you can basically do or at least nowadays you can do whatever you know film quality on your on your phone don't my thing is like yes it seems like a good acquisition candidate but then you start to think about who on earth would acquire them and it's like adobe maybe don't don't you think if the floor was high the floor would have been hit when it dropped 99 percent it's different you would have thought different they were doing some really dumb stuff maybe they've turned the i don't know just adding a subscription totally changes the business model maybe there's

which makes me which makes me wonder if it's something more related to the founder and it's not that the offers weren't out there but the founder didn't want to sell i don't know if that's the case but i with that much voting control you just i think that's a factor probably and yeah i i just said that the subscription doesn't necessarily change the business i think it does change the business i don't know if it totally changes whether someone would want to acquire this business. Agreed. Because if, if Apple's bought, if Apple's looking at buying this, just for instance, like that's the one that makes sense to me, right. It's kind of like the Beats acquisition, but Apple's buying it for the brand. They're buying it so they can sell GoPro

products. And then they don't care about the software business because they're just going to incorporate it into all of their subscriptions and their software business and, you know, increase the value of their consumers. And so they don't care about GoPro's little fledgling software business. They just care about the brand, at least I would assume. So looking at it from the outside so like I said it's a little bit I thought it was worth bringing up it's a little bit of a highlight for me I think low lights the years of languishing and then this new app that you just mentioned Brett quick seems a little bit fragile to me and more like a feature like you're mentioning there's like some stuff on all of our phones now that we can do

editing through our photo apps they said one of the things they were one of the selling points for it that they were talking about was that it's like a more curated version of your photo feed and so instead of just having like tons and tons of like photos and videos and all this type of stuff that it would curate it a little bit but again it seems more like a feature i know apple's trying to do some of that in the photos app um and i'm just not sure how many people like if you're not getting it through the subscription bundle i'm not sure if it's enough of a value driver that anybody actually gets it i don't know it's no that's a tough one for me that's a good point because apple apple google and samsung and whoever you know their camera products and their gallery or

whatever that stuff really hasn't been that great a lot of people complain about this stuff all the time but if grow pro fixes that i mean it's like all right well these guys can just see what they did and copy it um so yeah wouldn't you i guess my thing would be like would the bundle be better if you got sort of a discounted rate on a premier editing software instead of like so if they partnered with i think adobe does a lot of like they're sort of yeah yeah what if they partnered you got a discounted rate on that like wouldn't that be better than i mean i don't use quick i don't know how good it is but they just started up so i think i don't know i bet adobe is more than uh gopro's entire employee base working on stuff like this so all right uh yeah

and you already hit your highlights and lowlights right yeah it is all right then for me i think the changes in operating efficiency are a good sign um the economics are getting better with the subscription and the four million uh it seems audacious but it might be possible you know they're growing triple digit subscriber base right now um and they obviously have that easy marketing funnel with uh the different social medias but i should i should say that quick when it was a free app has nine million users or downloads so that's another way to okay uh low lights i'm not a huge fan of the ceo i don't think he's a tremendous operator uh no let me see that well yeah but go read the conference calls i encourage everyone to go read the conference

because it seems like he could kind of care less about shareholders um which it's fine like some business operators just want to run their business they don't want to be they're not they're worried more about the customer than the shareholder which is okay but we're shareholders so that's what we hear about um the ceo is okay uh and it seems like he's sort of carrying the weight operationally as he should but he's cfo too right yeah i think so um it seems like he's running the business seems like they're kind of just saying like the ceo is the visionary but it seems like more he's giving himself the title because he has 69 voting power uh they did they did make just mean to say explicitly in the 10k that the ceo is still head of design don't know why they needed

to tell us that but maybe he really just cares about making the good cameras yeah that's that's my primary low light and i don't know where revenue growth will come from yeah that's the big that uh you hate to make addressable market a low light but i i mean it really hurt them it hasn't gone anywhere for seven years yeah and i wonder did they make a mistake not trying to be like peloton and sell their cameras at a premium do you guys i think for what they've done since then yes like if if they knew they weren't going to be able to that all these ancillary services that they were doing for the last six years wasn't ever going to take off,

then they should have been selling them at a premium and really trying to capture that premium market and get better margins. But the problem is like you would have thought that they could have captured more subscription-based services and all these add-ons and the accessories. And like that's where they were supposed

to make their money, but they haven't really. I don't know, Ryan, what were you going to say? Also like Peloton you could say is best in class quality. GoPro is good. But they are not production-level cameras, which if you're going to buy – if you're going to really, really pay up for a camera, why not buy like a production-level camera? Oh, because they're $10,000? Yeah. Well, and in the action camera thing, like to be fair, GoPro is priced at a premium to like – you can find other action cameras that aren't as high quality and stuff like that.

So they're priced at a premium within that niche. Yeah. yeah but um but it's not like some crazy premium either at least in my when i've looked at them before it doesn't seem like gopros are way more expensive than like the the more kind of generic version of the cameras yeah and the the thing is with something like okay go pelotons in a way i really don't get it but it's like a fashion thing right or like you know it's kind of like where people are they have them it's kind of it's a brag almost that's kind of well people may not say luxury at least the wrong word yes it's uh that's part of it gopro the way they are

you attach them to your body they look ugly i don't know yeah that's part of the deal it's like a downside i don't think yeah i don't think a gopro is a flex the way a pellet turns all right the uh i'll get oh i guess we're kind of getting to more or less interested but i'll hit any highlights on that i had that we missed um i think the software stuff is a good move it's the move they have to make um maybe if they can get to outside of just people who are already camera owners that could expand the number of subscribers they have but i mean their category's just been stagnant over the last decade that's a huge liability in my book hardware is just so tough and you're going to have stock option and convertible headwinds now it'll make

the enterprise value change on the convertibles but there's i don't know 15 million in stock options outstanding that's going to be a headwind too um yeah there's some low lights i don't know i guess we'll wrap things up more or less interested ian for me this was a company that i thought i i had never really looked at before but i think after looking at i'm actually going to be a little bit more interested i think there's a case here where um it's all for me the thing all hinges on how what's the churn rate on this subscription if the churn rate is low um then this is probably something i'm gonna look into more but if that churn rate is high um something a business that i'm not that interested in and we just don't have a great

grasp on that. I think it's just too early to tell on some of it about what the pattern of these consumers is going to look like. So I'm slightly more interested. I think there's some opportunity for an investment here. Yeah. And you did bring up a good point where we may have been talking about this before we started recording the subscriber numbers when they do that bundle thing. It's unclear whether that just with it. Yeah. They bundle a camera give you subscriber it's unclear whether that's a bit artificial in that growth and that's that's a big concern for me too yeah what do you think it might be too young or the subscription part might be too young to see how low churn truly is um but i'm less interested this could be you could still

generate good returns i think at a two billion dollar value or 1.9 billion dollar valuation if And if they can get to sort of $200 million in operating cash flow, that can still generate good returns. But I don't see this being a huge compounder. I don't know where growth comes from other than changing sort of the economics of the business. I see it unlocking a little bit of profitability there, but I don't see them expanding the top line a whole lot. Yeah, yeah. I don't think anyone can disagree with you there, Ryan. I'm kind of on the fence.

look, if they start generating a hundred million dollars in recurring revenue, that's high margin that puts, and the churn is low. Like you were saying that big concern there that puts the floor on the stock, but what's the upside. Yeah. Um, they say, you know, there's a lot of businesses that have been in smaller markets that have really just reduced their share count by like 80% over a decade. And that's where a lot of the returns come from. I looking at the balance or looking at their kind of the share count stuff that concerns me a bit too and yeah it's just the i don't know if there was a clear path to five million subscribers that's great but i just really worry about that yeah and i wanted i i actually wanted to like i

picked this stock for last week so i wanted to like it and i it was recommended by i think it's like akram's razor yeah smart guy on twitter yeah smart guy on twitter someone we respect and so i i wanted to like it but i just came away uh not being convinced of the growth yeah all right uh ian anything else and if not you're picking for next week so what do we got yep for next week we'll get a little bit bigger we're gonna go with uh social media social commerce uh pinterest so taking a look at the uh one of those battleground social media stocks yeah all right well that's going to do it for this episode. As always, use our code CCM at checkout to get $10 off your first month at 7investing. Remember, we are not financial advisors. Anything we say on this show is not

formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital may hold securities discussed in this podcast. Thank you all for listening or for the few that watch and we'll see you next week. Bye.