$GPRO: [Q3 Update] Becoming a World Class Content Creation Ecosystem
Note: this is an update to my deep dive on $GPRO.
$GPRO continues to turn around well. The share price is lagging behind considerably.
$GPRO is now pointing to a bright future, in which it becomes a world class content production ecosystem. I see a good 10X opportunity from here.
$GPRO stock has been declining in slow motion for 6 months now, just after reaching multi year highs. There has been ample space and time to second guess the long thesis, but as always, focusing on fundamentals has been and continues to be our north star. $GPRO Q3 ER is what turnaround dreams are made of. Management continues to execute wonderfully and $GPRO is well on its way to becoming a FCF machine, with most market participants looking the other way. We are well into oversold territory and much like $SPOT (deep dive) for the past few weeks, I would not be surprised to see a strong rebound in the share price coming up.
Highlights from the ER conference call:
I am quite sure that Bryan McGee is now effectively running the company. Nick barely said anything during the conference call and it was mostly Bryan nailing it, specially in the Q&A. When I initiated my position in $GPRO, it was largely due to an intuition that Bryan was / is a world class operator. I believe we are not far from this being evident. I see Bryan transitioning into a CEO role soon and Nick stepping down into a chairman role - this is already happening behind the scenes.
Non-GAAP gross margin is up to 43.8%, up from 36.2% in Q3 2020. That´s a 20.99% YoY increase. Management says this is due to the growing success in the focus on premium hardware and the D2C shift, as I laid out in my deep dive.
$GPRO´s balance sheet is getting stronger, as it continues to yield a growing ability to produce cash. FCF is solid, at 166m$ in the TTM (15% of revenue).
Subscription biz is exploding. At the close of Q3, we had 1.34 million GoPro subscribers, representing 168% year-over-year growth, adding approximately 840,000 new GoPro subscribers since the close of Q3, 2020.
$GPRO clearly has pricing power now, with its street ASPs reaching 381$ in Q3, up 25% YoY. “The mix of cameras with MSRPs of $300 and above, including our newly launched $499 MSRP HERO10 Black, grew to 98% of our Q3 camera rev.” Focusing on premium hardware is not only driving margins, but is turning $GPRO into a solid inflation hedge.
$GPRO is now fundamentally efficient at listening to customers and giving them what they want in an efficient way. With R%D the leanest it has been since 2014, whilst ASPs continue to rise, I now have confidence that $GPRO has a culture optimized to continue making life easier for content creators. This alone is going to be of immense value going forward, as I will explain in the next section.
The supply chain is OK, despite global shortages. “Gopro.com and our retail partners will be stocked and ready for shoppers this holiday season.” I do not know how they have done, but they seem to have worked out shortages very well.
Quik App now has 168,000 subscribers. This seems harmless, but is quite relevant as I will also explain the next section.
Valued at 1.476$B, you may agree with me that the company is considerably undervalued. You can check out my thoughts on the valuation in the deep dive. Moving on, I want to address a part of the long thesis that I have not seen my fellow longs take on yet, but that I believe will become the common narrative a year or two from now. The above are signs that $GPRO is effectively turning around, but what is actually happening is that the company is non-obviously becoming a world class content creation ecosystem. This is going to be very valuable because as you may know yourself, today quality content is cash.
As $GPRO continues to funnel hardware customers into its subscription service, it is effectively populating an avenue which goes much deeper than its hardware business. As a content creator, once you have captured raw footage with hardware, the rest of the work is mostly software driven. Turning raw footage into engaging content requires taking many small and cumbersome steps, including adding other raw materials such as music, that are quite fatiguing.
Beyond populating this avenue, $GPRO is taking baby steps to solve the pains that content creators experience in the second half of content production, such as the launch and iteration of its Quik App, which enables easy editing and distribution on social media. This is still in the early phases, much like Bryan running the company a year or two ago, but we are heading in this direction.
What gives me confidence that $GPRO is going to get there is:
Its resilience in getting back from mistakes in the past.
Its now demonstrated ability to give customers what they want in a cost effective way.
#2 paves the way for continued execution to make content editing and distribution easier through time, which in time is going to materialize as an ecosystem that makes creators´ lives way easier and hence, will make $GPRO far more valuable than it is today. I believe we will see this pop into plain sight in the next 8-12 months.
As a final remark, I wanted to thank all my readers for their support. I never thought I´d be able to share my thoughts on the internet and build an audience like this. I am really grateful to be able to do this and for the connections that I´m making with many of you. It gives me great joy to know that my investment ideas add value to my readers. I hope the thoughts I continue to produce help you become a better investor. Thank you! 🙏🙏
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Hard disagree on Quik. At least on the android store, the app is recently bombing, with complaints about core features being completely broken.
For your thesis to prove true, it needs to nail hardware and software, to be priced like the iPhone for cameras -- and it's only got the hardware, which is increasingly coming under fire by cheap knock offs.
The reason why the iPhone has prevailed is by transforming the user experience. Speaking of my own experience, using a goPro, I just don't see the same craft and attention put in. Put it this way, would I buy a goPro a cheap knock off product? I don't see the same appeal, even for content creators, especially when core sections of their main app is broken.
I genuinely don't believe my take is biased either. I'm going pretty far back in app reviews, looking at various filtering options. I want to give them a chance, but I don't see how they'll turn things around. Heck, one of the reviews recommends people to go look at insta360.
Counterpoint: they have 37 engineering jobs open at the moment: https://jobs.gopro.com/jobs/category/engineering#/
Counterpoint counterpoint: As an engineer, the entire job market is pretty hot, I'm not entirely convinced they can revamp their engineering culture. Thoughts?