GoPro: The Turnaround Continues

Q3 2023 ER Digest

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Edited by Brian Birnbaum and an update of my original GoPro deep dive and my Q2 update.

1.0 The Structural Advances Persist

Following the soft results in Q2, GoPro revealed tactical levers that will buoy the company through macroeconomic storms.

When the turnaround is complete, I still believe GoPro will be worth over $30 per share.

GoPro has been transforming its business by leveraging a new subscription business model, into which it funnels a growing number of customers from its traditional hardware business. Over the last few years, this has seen GoPro produce impressive levels of free cash flow.

The CEO has stepped back to a more visionary role. CFO Bryan McGee is now operating the company, with great success. GoPro is to action cameras what Apple is to smartphones, dominating its niche and strengthening its base from which to orchestrate its turnaround.

GoPro´s moat is far stronger than the market believes.

GoPro has figured out new ways to serve its customers at marginal cost, delivering highly accretive ARPU (average revenue per user) increases. A no-brainer for GoPro´s customers due to the value-add, the subscription business model has an 80%+ gross margin.

In turn, GoPro is experimenting with camera derivatives produced through design and manufacturing processes traditionally used to produce the cameras themselves. These derivative cameras help expand the TAM and drive more volume in the subscription business.

Until Q2 2023, GoPro was:

1. Cutting retail presence and driving customers to gopro.com.

2. Focusing on the premium level hardware (flagship cameras).

3. Giving customers on gopro.com a subscription discount equivalent to the retailer´s cut.

The focus on premium hardware expanded margins. In turn, the incentive to subscribe led to the impressive revenue growth noted in the graph above.

However, inflation drove production costs up sharply and chipped away performance at margin. A general pullback in consumer electronics (tracking the broad PC pullback) hurt sales of premium cameras, stiffening the operational levers.

Nonetheless, in my Q2 update, I argued that the company´s structural advances would persist, giving management the opportunity to add new levers. Since Q2 2023, the company has pivoted to:

1. back to retail, with increased marketing.

2. back to entry-level hardware, dropping prices to pre-pandemic levels.

The above strategy was designed to drive expansion through subscriptions. In the Q2 update I explain the validity of this thesis. Yet I also posit that GoPro incurs a major risk: selling entry-level cameras may erode its image and, by virtue of such, its moat.

In Q3, total revenue of $294M exceeded expectations of $281M. Both the sales of premium and entry-level cameras outperformed. We have seen great brands like Apple and Porsche run this playbook without diluting their appeal to customers. So far, it looks like GoPro is pulling it off.

Total units sold is up 31% sequentially and 16% YoY; the new approach is driving volume, which will in turn convert into subscriptions. 

GoPro has added the four following levers:

1. Lowering the cost of entry-level cameras.

2. Increasing the attach rate.

3. Driving up retention.

4. Deploying new, premium subscription tiers to increase ARPU.

In the next section, I will describe each of these levers in depth.