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GoPro Is Not The Next BlackBerry

Summary

We agree with the Barron's report that GoPro has essentially no moat currently, and low barriers to entry subject the company to intense competition.

GoPro web traffic and search interest is down this year, implying that its attempt to become a content distributor and media company is reaching roadblocks.

BlackBerry failed because it failed to appeal to beauty, and in so doing, failed to appeal to the important personal consumer demographic that drives technological adoption.

Much unlike BlackBerry, GoPro's marketing strategy is not purely utilitarian, and its target demographic is not corporate business.

GoPro has created a culture that appeals to consumers and will sustain strong unit growth both domestically and internationally over the next few years.

GoPro (NASDAQ:GPRO) shares fell more than 8% in trading on Monday, September 21, in light of a Barron's report in which the author sees further downside to the $25 range for the stock. The author also compared the company to former tech giant BlackBerry (NASDAQ:BBRY). As many who have read our previous GPRO articles can attest to, we are not long-term GoPro bulls. We have criticized its weak economic moat, low barriers to entry, and high subjection to intense competition from companies like Apple (NASDAQ:AAPL), which would be able to build a comparable, if not superior, product in-house. At the time of our earlier articles, the stock was a great short when shares were trading north of $50.

Despite the apparent weaknesses spelled out in the Barron's report, the shares of GoPro are worth more than $25, and GoPro is certainly not the next BlackBerry for numerous reasons, primarily stemming from adaptability and differences in generational appeal. As we said last week, we believe the shares are worth $36.

We will begin here by stating that GoPro currently has essentially no economic moat, in agreement with what was stated in the Barron's report. Low barriers to entry and the high threat of substitutes subject the product and company to intense competition from a plethora of competitors, including Apple. No one wants to be in competition with a company that boats the innovative history or resources of Apple, so this threat is a very real and concerning one for GoPro. It is viable that Apple builds an entire GoPro-like replica product and steals significant action camera market share both domestically and internationally from GoPro, and that it does so at a lower cost, initiating a price war that would weigh on GoPro's margins. GoPro CEO Nick Woodman, though, says there is zero reason to believe this.

It is also very concerning for GoPro that web traffic to its website is down drastically since December, and that GoPro search interest is down YoY, implicating that its attempt to become a content distributor and media company is hitting roadblocks. According to Alexa web analytics, the GoPro.com website traffic has spiraled downward since December, and while it has picked up in the summer of 2015, traffic is still far off its December high. This can be explained by increased sales traffic in the holiday shopping months skewing the figures, but looking into Google search interest trends reveals that GoPro search interest is actually lower now than it was at the same time last year (August/September 2015 versus August/September 2014).

So, the company unequivocally has some serious issues, and we agree largely with the Barron's report from a competitive strategy standpoint. We disagree strongly, however, with the section of the report that made headlines: "GoPro is comparable to BlackBerry".

The companies may both be one-trick ponies (though GoPro is making some innovative pushes currently, which we discuss more in-depth below), but we believe that outside of this skirt similarity, the two companies are very, very different.

BlackBerry failed because it failed to appeal to beauty, and in so doing, failed to appeal to the important personal consumer demographic that drives technological adoption. BlackBerry rose to immense popularity by being the most useful device on the market, and through appealing to the corporate business customer, wasn't so to the personal consumer. We believe this article from The Wall Street Journal puts it best:

If the iPhone gained traction, RIM's senior executives believed, it would be with consumers who cared more about YouTube and other Internet escapes than efficiency and security. RIM's core business customers valued BlackBerry's secure and efficient communication systems. Offering mobile access to broader Internet content, says Mr. Conlee, "was not a space where we parked our business."

The iPhone's popularity with consumers was illogical to rivals such as RIM, Nokia Corp. and Motorola Inc. The phone's battery lasted less than eight hours, it operated on an older, slower second-generation network, and, as Mr. Lazaridis predicted, music, video and other downloads strained AT&T's network. RIM now faced an adversary it didn't understand.

"By all rights the product should have failed, but it did not," said David Yach, RIM's chief technology officer. To Mr. Yach and other senior RIM executives, Apple changed the competitive landscape by shifting the raison d'être of smartphones from something that was functional to a product that was beautiful.

The iPhone launch taught BlackBerry and the entire technology market something crucially important. Former CTO Mr. David Yach says it best, per the WSJ article linked above:

I learned that beauty matters.

Much unlike BlackBerry, GoPro's marketing strategy is not purely utilitarian, and its target demographic is not corporate business. GoPro, perhaps more so than any other business, appeals to beauty, design, and lifestyle themes, utilizing social media and original content to promote its brand, as opposed to boasting spec, tech, and safety/security advantages. As such, its target demographic is the personal consumer, not corporate business. The company is perfectly in line with the consumerization of emerging technology, and has developed what we believe is a loyalty and consumer appeal that BlackBerry never did. Indeed, GoPro's current marketing strategy of appealing to beauty and design over technical specifications is the exact strategy Apple embodied to wipe out BlackBerry.

As cliched as it might seem, GoPro has developed more than just a camera product - it has developed an active lifestyle culture surrounding this camera that will be very difficult for any competitor, even Apple, to imitate.

We believe the Barron's report misses this, and underestimates the power of a beautiful one-trick pony. It is true that high-performance one-trick ponies with little aesthetic appeal to the personal consumer or one-trick ponies that lack a surrounding culture quickly fade. But a technology product that appeals to consumers, entertains, does more than just "work", and has developed a culture surrounding it has legs to run.

Think of the iPhone. Its sales have increased since the 2007 original release date. That is 8 years of strong unit growth for a product that simply upgrades every 12 months.

The GoPro camera is not the iPhone, and it will not have the same effect on society, neither does it have nearly as large of a culture surrounding it, nor is it a must-have product like the iPhone. In many senses, the two devices are incomparable, and we acknowledge that. We do believe, though, that GoPro has created a culture that appeals to consumers, and will sustain strong unit growth both domestically and internationally over the next few years. The comparison here is that Apple did the same thing for the iPhone in 2007.

Even on the point that both BlackBerry and GoPro are one-trick ponies, bulls could easily argue that GoPro is adaptable, where BlackBerry was not, and that GoPro is taking strategic steps to advance its product beyond just action cameras, including law enforcement and drones. While neither of these markets are locks for GoPro to enter and/or capture market share, especially in the face of existing giants in each market, it does illustrate that the company is attempting to leverage its existing name brand popularity to enter new spaces and provide further runways for growth. This is something BlackBerry did not do until after the iPhone was released, and even then, it was too little, too late.

GoPro isn't a great company with a terrific moat. It is not a $10 billion company with diverse product offerings and strategic competitive advantages, nor is it the best long-term portfolio holding with immense upside.

But GoPro certainly isn't the next BlackBerry. The two are actually very dissimilar.

The company entered the right market at the right time. It has developed a potent lifestyle culture surrounding its product, and appeals to the personal consumer. It has a "beautiful" aspect about it and a "coolness" factor that is indisputable.

GoPro cameras will continue to sell due to these reasons, even in the face of increased competition and overlapping competition from higher camera-quality smartphones. Sales won't ramp up considerably. US sales should drag on international sales as domestic action camera market saturation becomes an issue, but sales will ramp up sufficiently enough to justify our $36 fair value (refer to our previous article provided above). International markets provide huge growth opportunities for GoPro, and it should be able to leverage its "American coolness" to create a similarly cool, action lifestyle culture in foreign markets.

At this point, an investment on GPRO relies on the follow-through of its customers to keep buying cameras even if new entrants enter the market. We believe this is likely, given the current culture GoPro has developed, and that history is actually on GoPro's side for companies that have built more cultures around their products. With 18% of the short float and a 15.5x forward P/E multiple on a 5-year analyst earnings CAGR of 31.9%, we think the shares become more and more attractive on the long side the lower they get.

In sum, we believe the Barron's report got it wrong. Shares of GoPro are worth around $36 per share, not $25 per share, and GoPro and BlackBerry are actually quite dissimilar. GoPro shares aren't a great value, but they are a decent value here. The lower they go, the better value they will become. If the stock hits Barron's $25 value, that might be a key trigger point to load up on shares.


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