GoPro (GPRO -2.86%) stock has been crushed recently. The stock was pulled down by an overall market sell-off. With growth stocks getting hammered hardest during this market correction, GoPro stock has been hit pretty hard, down about 23% in the past month. But is the stock oversold?
GoPro cameras. Image source: GoPro
Valuing GoPro stock
GoPro's financial statements represent about exactly what any investors would want to see from a fast-growing company: rapidly growing revenue, heady gross profit margins, and an impressive bottom line even as spending soars.
The problem, of course, is that the story usually never stays this good. If capitalism has its way, competition will fight fiercely to muscle in on GoPro's 46% profit margins and its fast-growing revenue. This increased competition could drive growth and profitability down sharply.
With this said, it's difficult to value a company like GoPro. But, with the help of a huge dose of conservatism in any forward-looking assumptions, it's at least worth a shot.
So, what could the approximate intrinsic value of GoPro shares be?
In order to look forward, let's first take a look back. Currently, the company's revenue is growing at an impressive 72% year-over-year growth rate. Free cash flow in the trailing twelve months is up 106% from the year-ago quarter. The company is a clear market leader in the capture camera segment and no serious threats are on the horizon.
With little reason in the near-term to believe GoPro's gross profit margin will see any significant pressure with demand for the company's products as hot as ever, it's fair to estimate the company's business growth in the near term to continue to be robust, though much at rapidly decelerating rates -- leaving room for conservatism, subpar execution, and increased competition.
With all this in mind, let's forecast that GoPro grows free cash flow by 50% in the next twelve months, but this growth rate decelerates about 25% per year. If this happens, GoPro's free cash flow growth in the next 10 years would look something like this:
|
Year |
FCF Growth Rate |
|---|---|
|
1 |
50% |
|
2 |
37.5% |
|
3 |
28.1% |
|
4 |
21.1% |
|
5 |
15.8% |
|
6 |
11.9% |
|
7 |
8.9% |
|
8 |
6.7% |
|
9 |
5% |
|
10 |
3.8% |
Assuming GoPro's free cash flow grows approximately in line with inflation into perpetuity, and using a 12% discount rate to calculate the present value of future cash flows, the intrinsic value of GoPro is about $53 per share, which is a slight premium to the company's $47 share price at the time of this writing.
Of course, GoPro could easily exceed this estimate. Moreover, history suggests it very well might. But there are also worst-case scenarios, such as a larger player like Apple entering the space and snapping up GoPro's upside opportunity, which makes bullish cash flow projections risky.
While a simple discounted cash flow valuation for GoPro stock shouldn't substitute comprehensive analysis, including a deep understanding of the company's market, competitors, opportunities, and threats, it does at least suggest GoPro's post sell-off stock price may not be as lofty as some investors might first think.
