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GoPro: We See 15% Upside From Here


GPRO has sold off even further recently, likely in response to upgraded durability and photo capabilities on the iPhone 7.

But improved iPhone 7 functionality will not hurt Hero5 sales, as each are fitted for a different purpose.

For most consumers, the iPhone 7 is too valuable to risk in action situations; the Hero5 is suited for these conditions.

Into perpetuity, we think GPRO will sell, on average, 5 million to 6.5 million cameras per year at a $300 ASP, and 500,000 to 1 million drones per year at a $750 ASP.

Assuming 40% gross margins and normalized opex of $700 million per year, we think GPRO is worth $2.3 billion, or just over $16 per share.

In the 2 days since we advised to buy the dip in shares of GoPro (NASDAQ:GPRO), shares have sold off another near 7%. Mostly at fault is the increased durability and camera functionality of Apple's (NASDAQ:AAPL) iPhone 7, as well as continued insider selling. The insider selling is troublesome, but nothing new. Additionally, we maintain the iPhone 7 and Hero5 are fitted for different purposes, and that those sales will not heavily overlap.

GPRO data by YCharts

While the increased durability of the iPhone 7 does serve a functional purpose, and does allow the phone to get somewhat wet, it is hardly durable enough to be suitable for many action camera shots. Any of the extreme events that GPRO cameras are most normally used for (snowboarding, mountain biking, surfing, sky diving, skateboarding, etc) are situations that would put an iPhone 7 at great risk of being damaged or broken.

The iPhone 7 is too valuable (both from a monetary and social utility standpoint) to be continually put at risk in action camera situations. GPRO cameras are also designed specifically for action camera shots (they're small, durable, and hardy) whereas iPhones are not. Consumers like the iPhone's big screen, but that screen makes it largely unsuitable for action sports. For many reasons, we do not see a smartphone, regardless of how good its camera, replacing a GPRO camera.

We like buying more here, then, because this recent sell-off doesn't make sense to us. We are less than 2 weeks out from the company's first ever drone launch, and the Hero5, which continues to show strong web search interest, will presumably launch shortly...