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Analyst details 'positive thesis' on GoPro, key risks

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Wedbush Securities Equity Research Analyst Alicia Reese joins Yahoo Finance Live to detail the firm's upgrade of GoPro stock, which is based on the action camera manufacturer finding success despite supply chain crunches and opportunities when travel restrictions eventually ease.

Video Transcript

[MUSIC PLAYING]

ZACK GUZMAN: We've been talking a lot about supply chain slowdowns and the issues there for big tech companies in 2021. But one company has managed to stay ahead of that supply crunch. That would be GoPro.

If you look at that stock over the last year, up by about 26%. So maybe not some of the craziest moves we've seen in the tech space. But one analyst, Wedbush, Alicia Reese is saying that there could be some growth drivers there, setting GoPro up to capitalize on actually figuring out its supply issues ahead of some of the other competitors out there and upgraded the stock from neutral to outperform. And she joins us now for more on that thesis. Happy to welcome you in. Alicia Reese here with us.

Alicia, when we look at it, maybe that's a name that people haven't maybe focused on, GoPro. But talk to me about what you like and how they're set up nicely here as we head into Q4 holiday shopping season.

ALICIA REESE: Sure. Well, you know, in the near term, they have some really nice pieces that set them apart from other consumer electronics companies. Everyone's feeling the crunch of the supply chain issues. But I think GoPro really got ahead of that. We saw some of that in Q3, where their gross margin expanded by over 700 basis points.

They were able to circumvent the supply chain constraints that we're seeing largely by focusing on manufacturing their highest tier product, and that helped them in a couple of ways. One, that narrowed down the manufacturing process to just one product, instead of a three or four-tier product. And they also were able to raise that ASP, and that drove gross margins higher.

And we think that continues through the fourth quarter and into 2022. They also are pushing towards direct to consumer, and that's raising gross margin, and that's a longer term play that's been happening for a while, and we think that continues well into 2022. And the biggest piece of our positive thesis is that there's ongoing revenue from subscriptions, and that's expanding and greatly expanding gross margins because that gross margin is 70% to 80%, and that's ongoing revenue, you know, for those who have attached that subscription to those hardware pieces that they're purchasing.

AKIKO FUJITA: So, Alicia, it sounds like, short term, GoPro is positioned well, number one, because they can churn out the products out to the market at a time when a lot of its competitors are struggling to get the parts in place. But how do things look from a product innovation standpoint?

I mean, sure, GoPro has been able to bring in additional levers here to churn out more revenue. And yet, one of the things they've struggled from, at least in the marketplace and perception, is that they're just not out innovating some of its competitors.

ALICIA REESE: Sure. So they have enough innovation to at least retain the GoPro enthusiasts that they've held onto for several years. And this year and part of last year, what set them apart, especially in 2020, was not that they were finding new customers. It's that they capitalized on the enthusiasts that they already had.

And they were actually able to grow units in 2020 over 2019, surprisingly, despite the lack of marketability of their products in 2020 with, you know, lockdowns. You know, most people use GoPros outdoors, not indoors. And international travel was largely shut down. But they were still able to grow units on that innovation.

So we think the innervation of the HERO10-- that's the current model-- is actually, you know-- it's interesting, and it's compelling over the prior model. And you know, international travel is still yet to resume. We're going outdoors more. So we-- in our model, in our thesis, it's not based on significant unit growth. In fact, our unit growth assumptions for 2022 and 2023 are roughly flat.

So we think that's actually upside as travel resumes and if GoPro is able to find more consumers to add to its enthusiast list outside of, you know, that core base.

ZACK GUZMAN: Yeah, it's pretty wild. I mean, I'm thinking back to you know when GoPro used to trade at like, what, $80 a share back in 2014. And we should be clear, your call here is not necessarily to ever get back to those levels here. You've got a price target of $13.50 up from $11 here. So, I mean, there is growth but maybe not ever getting back to what some of the loftier expectations were here for GoPro.

But, I mean, that's still a step in the right direction and kind of finding their niche for what this company really delivers on, which I guess when you're talking about those core consumers that have never left, it's kind of those, I guess, outdoor anxiety-producing moment seekers that are in the extreme sports space.

ALICIA REESE: Yeah, well, you also have some interesting use cases that they can apply it to. They certainly have parents. You know, parents want to buy it and capture their kids' sports activities outdoors. But they're also-- you know, in 2020, a lot of people are buying GoPro to use as a webcam. And so there's a use case that they can do by perhaps manufacturing a derivative product from their cameras at a lower price point, lower manufacturing costs, lower expense ratio.

So perhaps that's a way to really expand in the future. In 2020, they introduced-- or 2019, they introduce some mods that really helped for vlogging, like a microphone and being able to see the screen on both sides. So they've increased their core base basically by improving on those capabilities.

AKIKO FUJITA: So, Alicia, we've talked a lot about the upside. We're seeing the stock trading at $10.52. Your 12-month price target is $13.50. What do you see is the biggest risk, the headwind that could derail this case that you've laid out?

ALICIA REESE: Sure. I think the biggest risk is a perhaps ill-timed or ill-thought-out merger or acquisition or perhaps a product-- a new product that might come out that doesn't have the level of innovation needed or perhaps some derivative products that are too costly and don't hit. One of the things that happened in the past that really upset investors and drove investors away from the stock was their drone project.

Now, that was an epic failure. You know, I don't think that's going to happen again. I do think management has really found their niche now, and they know how to deal with their products and market their products to their customers and not go off and do something quite so outlandish. So I don't think the risk is nearly as high as it used to be. But that is still a risk. And I think investors are timid about that, about this stock for that reason.

ZACK GUZMAN: Wedbush Securities equity research analyst Alicia Reese there with a closer look at GoPro. Appreciate you coming on here to chatting with us.

ALICIA REESE: Thank you.

ZACK GUZMAN: Thanks again.

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