GoPro, the darling of the action video set, may find itself on another company's shopping list this holiday season.
Shares in the maker of mountable cameras have plummeted 73 percent this year. During intraday trading on Monday, GoPro's shares hit their lowest level since the company’s June 2014 initial public offering, thanks to a Morgan Stanley downgrade.
Amid this downturn, there’s a big question mark surrounding GoPro’s future. GoPro is still developing software that will allow users to more easily edit, share and store videos - a flaw in its feature set that even its own founder has likened to selling the iPod without iTunes.
Moreover, retailers may need to sell the company’s cameras at heavier-than-usual discounts over the holiday season amid an inventory build-up and it’s not clear how receptive consumers will be to its new drone product (which GoPro plans to roll out next year).
The uncertainty is weighing on GoPro. Its enterprise value relative to forward earnings before interest, taxes, depreciation and amortization or "EV/Ebitda" multiple -- a measure of how expensive a stock is -- is just 7.9, according to Bloomberg data. That means GoPro is valued just above traditional consumer electronics rivals like Fujifilm, Nikon and Garmin -- and less like a heady young company with a relatively recent IPO and boundless horizons ahead of it.
Since GoPro has no debt on its balance sheet and it isn't too large to swallow (its market cap is about $2.4 billion), potential acquirers and private-equity firms may see its lowly price as a buying opportunity. It also has strong brand recognition and ongoing year-on-year revenue growth -- attributes a buyer might adore.
So who might some of those buyers be? Although GoPro has been touted as a potential target for Apple, Fitbit, which also makes wearable devices, may be a better match.
The math works: Fitbit could pay as much as a 70 percent premium (or about $4.2 billion) in any mix of cash and stock for GoPro and still have the deal be accretive to earnings (even without factoring in any synergies), according to Bloomberg data.
Like GoPro, Fitbit is a one-trick pony (its wearable devices offer users a set of health metrics) and for that reason, it too is vulnerable. Fitbit itself noted in its IPO filing that its competitors have significant advantages including the "ability to leverage their sales efforts and marketing expenditures across a broader portfolio of products and services, larger and broader customer bases...and channel partners."
Similarly, in its earlier IPO filing, GoPro said its competitors have "the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products, broader distribution and established relationships with channel partners, access to larger established customer bases...and the ability to bundle competitive offerings with other products and services."
Groundhog Day? In any event, both companies seem keenly aware of the challenges they face and may be open to the benefits of joining forces. They also both sell more than a third of their products through four outlets: Best Buy, Amazon.com, Wal-Mart and Costco, according to Bloomberg supply chain analysis data.
Standing in the way of any deal are GoPro’s largest shareholders. Founder Nick Woodman still owns some 26 percent of the company and a majority of voting rights in the company. Though he sold shares in the second quarter, Woodman topped up his stake recently. Foxconn Technology Group, another big shareholder, described its stake as a "long-term investment" in a 2012 filing.
Perhaps none of these shareholders have to decide soon what to do with their shares. But everyone has a price and 'tis the season.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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