GoPro: Speculative Buy, But Huge Rewards

Ahh! GoPro (NASDAQ: GPRO). A stock that gravity took over. It crushed from $98.47 (early October 2014) all the way down to $15.90 (mid December 2015). Boy, was Citron Research right, when they predicted share-price would drop to $30 within a year, in November of the last year.

And what now? Is this end of GoPro or is there more?

As for me, I’m very skeptical of the market. I’m someone who loves to go against the investments of the crowd.

For example, when the Alibaba (NYSE: BABA) was launched, I was convinced that the market was hyped about it and I didn’t find any intrinsic value in BABA’s share price. Recent market sentiment about GoPro is SELL SELL SELL!!! Me being the skeptic, I say BUY BUY BUY!!!

And it’s not just because of my skepticism of the market, but because of Karma and more.


Karma is coming in 2016 for the short-sellers of GPRO. So take your profit while you can. GoPro has planned to launch its first drone, Karma in 2016. The introduction of a drone will expand camera maker’s product line, beyond making action cameras.

The release of Karma is released, will launch GoPro into Unmanned Aircraft Vehicle (UAV) market. The Smart Commercial Drones Market is expected to reach $27.1 billion by 2021 from $3.4 billion in 2014, according to Wintergreen Research, Inc’s report, “Smart Commercial Drones: Market Shares, Market Strategies, and Market Forecasts, 2015 to 2021.” According to the report, “The commercial grade consumer video drone segment is the largest one in terms of revenue in 2015, and it is expected to lead over the forecast period.”

GoPro founder and CEO Nick Woodman said at the TechCrunch conference in September that the company is planning to launch a drone in the first half of 2016, “development is on track for the first half of 2016. We have some differentiations that are right in the GoPro alley.” Karma is finally coming.

Hollywood is eager to change the way they take aerial shots. Not long ago, they used helicopters (some still do) to shoot from bird’s point-of-view and it costs a lot. Drone makes it all cheaper. Not only cheaper, but also safer and opens more creative ways of shooting a video. In other words, drones can do what helicopters cannot do.

On May 28, GoPro announced at Google’s I/O conference that it will build a 360-degree camera array for stereoscopic spherical videos. With the help of Google Jump, Google’s virtual reality system,  GoPro’s camera array, Odyssey can make videos like this. I believe the Odyssey can be very useful for real estate market. “360-Degree Real Estate Tour – Brought to you by GoPro.”

Oh, did I mention Odyssey has 16 cameras that work together as one? I repeat, 16. Hey GoPro, why don’t you knock out your useless and wasteful $300 million buyback program out of the park? According to its third-quarter SEC filing (10-Q), GoPro stated,

“To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.”

They spend 345x more on buybacks than they do on research and development. So GoPro, eliminate your worthless buyback program. “Customize” the money into research and development, and acquisitions. Customize the Odyssey. 16 cameras? Really? Reduce the size and improve the quality.

I strongly believe GoPro should acquire a small thermal imaging company. Thermal imaging can be a perfect fit for drones. I suggest GoPro acquires Seek Thermal, designer and manufacturer of high quality thermal imaging products. If GoPro acquires Seek Thermal or a different thermal imaging tech company, they will be able to reach sectors such as firefighting and agriculture. Diversified!

Partnership with Rollei – a German manufacturer of optical instruments and a seller of GoPro compatible accessories – might be helpful.

Another great acquisition can be Vuzix (NASDAQ: VUZI), a Google Glass rival, and a leading developer and supplier of smart glasses and video eyewear products in the consumer enterprise and industrial markets. Vuzix holds over 41 patents and 10 additional patents pending. Market cap. is currently $104.39 million. With $513 million cash on hand, GoPro can afford the acquisition. In January, Vuzix received a $24.8 million investment from Intel (NASDAQ: INTC). Intel bought preferred stock that is convertible into common shares equivalent to 30% of Vuzix.

In the third-quarter, GoPro’s revenue increased 43% year-over-year (Y/Y) to $400.3 million. On non-GAAP basis, its net income, operating income, and operating expenses increased 103.9% Y/Y, 71.7% Y/Y, and 44.3% Y/Y, respectively. On GAAP basis, it increased 28.58%, 105.36%, and 43.78%, respectively. The growth isn’t bad for a company with a market cap. of $2.49 billion. However, its inventory days increased 80.6% Y/Y from 67.7 to 122.3.

There are buyout rumors and one of the potential suitors being Apple (NASDAQ: AAPL). While this is a great news, it is not likely to happen in the first half of 2016. I believe the management of GoPro would not want to sell the company until they see the outcome of Karma. If the outcome is positive, the company will not be sold next year. If it is negative, the company will be sold unless they have something up in their sleeves. Management’s actions should a sign of what’s to come.

I’m confident the founder of GoPro will turn things around next year. GoPro can be a leader in its field if it eliminates the buyback program and invests into the future. According to Futuresource Consulting, the global action camera market grew by 44% Y/Y in 2014. It is expected to grow at a compound annual growth rate (CAGR) of 22.2% between 2014 and 2019. GoPro should target not only sport enthusiasts, but the film and television industry, real estate, and other sectors such as, firefighting and agriculture. In order to do that, GoPro should first create a product that suits the sector’s needs. First impressions are important.


Disclosure: I’m currently long on the stock, GPRO, at this time (December 26, 2015).

Note: All information I used here such as revenue, net income, etc are found from GoPro’s official investor relations site and its SEC filings.

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.

Cisco’s Impressive 4th Quarter Earnings Report

This is a follow up post to the previous post (Cisco Systems Inc. (NASDAQ: CSCO) Undervalued). Before continuing to read this post, I suggest reading the previous post if you haven’t already. The previous post includes some important facts that are not included in this post. If you have any questions/comments, feel free to leave a comment below or contact me. Thank you.


On Wednesday (August 12, 2015), Cisco (NASDAQ: CSCO) reported its first earnings report with Chuck Robbins (CEO of Cisco) at the helm and it was very impressive. For 4th Quarter Fiscal Year 2015 (Q4 FY’15), revenue was $12.8 billion, up 3.9% year-over-year (Y/Y) from $12.4 billion and EPS (GAAP) was $0.45 per share, up 4.7% Y/Y from $0.43. Net income (GAAP) was $2.3 billion, up 3.2% Y/Y from $2.2 billion.

This earnings report concludes Fiscal Year (FY) 2015. Let’s take a look at FY GAAP results. FY’15 revenue grew 4.3% year-over-year to $49.2 billion from $47.1 billion. Net income grew 14.4% to $9 billion from $7.9 billion and EPS grew 17.4% to $1.75 from $1.49.

During FY’15, Cisco continued its commitment to shareholder return – returning $8.3 billion through share buybacks and dividends – 73% of free cash flow. Yet, Cisco has total cash, cash equivalents, and investments of $60.4 billion, up 16.02% Y/Y from $52 billion in Q4 FY’14.

Key Financial Measures
Key Financial Measures – Cash, Debt, OCF

The company has $25.4 billion in debt, 21.26% increase Y/Y. Their operating cash flow increased 14.56% Y/Y to $4.1 billion. I don’t see the current debt as a problem since the company has a strong balance sheet.

Regional Performance:

Americas revenue increased 6.63% Y/Y to $7.8 billion. EMEA (Europe, the Middle East and Africa) was slightly flat at $3.1 billion. APJC (Asia-Pacific, Japan and China) was flat at $1.9 -billion. Both EMEA and APJC revenue was affected by forex (currency) headwinds. With strengthening dollar – which hurts sales revenue aboard – Cisco should be able to offset the headwinds from it because of a strong domestic market. Stronger dollar makes American goods expensive and less competitive overseas, hurting earnings for U.S. companies. Cisco has a very strong domestic market and continues to increase its footsteps.

Geographic Revenue
Geographic Revenue

Guidance: (Not a big fan of guidance)

Cisco expects 2%-4% Y/Y revenue growth and EPS of $0.55-$0.57 for Q1 FY’16, in-line with a consensus for 2.5% growth and EPS of $0.56. While company’s guidance is important, I believe your own guidance for the company is more important.

Segment Performance:

Cisco Segment Performance - Q4 F'15
Cisco Segment Performance – Q4 F’15 – Source: Slide 7

Product revenue grew 4% Y/Y. Out of nine segments, two segments (“Service Provider Video” and “Other Products”) declined Y/Y, but remaining seven segments grew.

Today, Cisco is looking to acquire businesses focusing on wireless software, video delivery, cloud-based security technologies and investments in cyber-security. They are more likely to acquire smaller companies with strong presence in areas (product and geography) that Cisco itself does not have. The company plans to invest $1 billion into the United Kingdom over the next 3-5 years to boost the country’s technology sector, especially Internet of Things (IoT). During the Q4 FY’15 Conference call, Kelly Kramer, Chief Financial Officer (CFO) stated that Cisco was “…committed to looking at the right acquisitions at the right price to drive our growth strategy.” I’m currently looking into companies that I believe Cisco should acquire (post to come regarding it, if I find a suitable company).

Key Financials:

Key Financials (Q4 FY'10 - Q4 FY'15)
Key Financials (Q4 FY’10 – Q4 FY’15)

In the “Key Financials” chart above, you see “EBITDA” and “EBIT”. Let me take a moment to explain what they are and why they are important.

EBITDA: An acronym for “Earnings Before Interest, Taxes, and DD&A (Depreciation, Depletion and Amortization)”. It’s an income statement metric which represents earnings prior to the payment of interest expense, taxes, depreciation, depletion and amortization. EBITDA is a proxy for (but not a substitute for) cash flow generated by the assets of a company (In this case, Cisco) before debt holders and tax authorities are paid. A good EBITDA growth rate can show investors that the company has a future for potential growth.

EBIT: An acronym for “Earnings Before Interest and Taxes”. EBIT is similar to EBITDA, but It’s an income statement metric which represents earnings prior to the payment of interest expense and taxes.


5-Year CAGR (Compounded Annual Growth Rate):

  • Total Revenue: 4.19%
  • Gross Profit: 2.86%
  • EBITDA: 4.14%
  • EBIT: 3.57%
  • Net Income: 2.95%

While 5-Year CAGR numbers may look small, it’s very reasonable for a company of Cisco’s size.

I love the valuation at current levels. My target price is $32, unchanged from previous post. I’m taking “Warren Buffett” style approach on Cisco. I’m in this for a longer-term and my target price will change as time goes on. Strategic acquisitions, for example, will increase my target price because in the longer-term, the acquired company (depending on the company) will bring in more income although there will be costs in a short-term. After all, it’s the opportunity cost.

Any pullbacks in the stock price will be taken as an opportunity to buy more shares. The only con are the brokerage fees that comes as a disadvantage to small investors like myself.

If you have been wondering why non-GAAP numbers are not listed here, it’s because I don’t look at them much. Companies can do whatever they want to do with it and it’s hard to trust the non-GAAP numbers. On Cisco’s financial reports, they state “These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.”

Non-GAAP is a propaganda tool to raise capital and/or stock price (AKA equity compensation).

I’m not saying I don’t look at non-GAAP numbers, but GAAP is much more important to look at. Exceptions to look at non-GAAP are when there are such reasonable large write-downs and/or restructuring charges (one-time, non-recurring” expenses). Reasonable.

All comments welcomed.


Disclosure: I’m currently long on the stock, CSCO. I went long last year at price just below $25. I will continue to be long.

Note: All information I used here such as revenue, income, etc are found from Cisco’s official investor relations site, Bloomberg terminal, FactSet, and S&P Capital IQ. The pictures you see here are my own (except “Cisco Segment Performance – Q4 F’15”).

Disclaimer: The posts are not a recommendation to buy or sell any stocks, currencies, etc mentioned. They are solely my personal opinions. Every investor/trader must do his/her own due diligence before making any investment/trading decision.

GE’s massive makeover

Last Friday (April 10, 2015), General Electric (GE) announced a plan to sell off real estate and reduce the size of their financial business. They will be selling majority of GE Capital Real Estate assets for about $26.5 billion. GE will also sell away the remaining portion of GE Capital. It aims to complete the sale of GE Capital over the next two years.

GE’s financial unit is one of the largest financial entities, with assets of half a trillion dollars. It includes everything from consumer loans to property. When the financial crisis hit, earnings from GE’s finance unit collapsed. There were (still is) strict regulations on financial services. As a result, Jeff Immelt, CEO of GE, promised to shrink the finance arm.

Ever since the financial crisis, G.E. has taken small steps to shrink its finance operations. Last year, it spun off its private-label credit card business, known as Synchrony Financial (Ticket: SYF), for $2.9 billion initial public offering (IPO).

To who? GE said it would sell nearly all of its real estate portfolio to investors including Blackstone Group and Wells Fargo & Co for $26.5 billion. There are a further $165 billion of assets that needs to be sold. There will be buyers other than Blackstone Group and Wells Fargo & Co. The company plans to keep the finance assets directly related to selling its products such as jet engines, medical equipment, and electrical grid gear. Remember; Warren Buffett has a stake in both GE and Well Fargo. I believe Warren Buffett will be increasing his stake in GE.

Why now? GE is selling their real estate and financial business for two reasons. First, commercial real estate prices are up. Commercial real estate prices are higher today than it was before the financial crisis. Lastly, rates are still low. If the Fed hikes interest rates (cost of borrowing rises), it will be unattractive to finance any deal. Therefore, it’s a perfect time to take an advantage of the low rates and the high prices.

Source: http://www.greenstreetadvisors.com/about/page/cppi/
Source:       http://www.greenstreetadvisors.com/about/page/cppi/

GE is taking the right move, by focusing more on industrial sector. By beginning to sell $26.5 billion worth of real estate assets, GE will be returning to a kind of company it is supposed to be, an industrial company. GE’s operations include jet engines, oil drilling equipment and medical devices. I would not be surprised if GE makes industrial acquisitions, both small and big. I would not even be surprised if GE merges with another industrial business.

Investors are very happy with the deal, including me. General Electric’s stock (Ticker: GE) rose more than 10%, on a heavy volume, to $28.68, highest since September 2008. On Friday, more than 350 million shares (GE) were traded. GE expects to return more than $90 billion in cash to investors through dividends, share buybacks and the Synchrony exchange through the end of 2018. $50 billion will come from a share repurchase program, one of the biggest on record. As of January 31, GE had 10.06 billion shares outstanding. GE expects to reduce it by 20% to 8-8.5 billion by 2018. In the longer term, the stock price will continue to increase.

GE (General Electric) - Daily
GE (General Electric) – Daily

Not only GE wins here, but also Uncle Sam. GE will bring back $36 billion in cash that resides overseas and will have to pay tax to the U.S government, ranging from $4 billion to $6 billion.

GE said it would take after-tax charges of about $16 billion for the restructuring in the first quarter, with $12 billion being non-cash charges. It will reduce their Earnings Per Share (EPS). On Friday (April 17, 2015), GE will report their first quarter earnings.

GE expects that by 2018 more than 90% of its earnings will be generated by its industrial businesses, up from 58% in 2014.

Past & Future:

GE's past and future
GE’s past and future (source: http://www.ge.com)

 

 Note: I currently own shares in GE, which I brought last year at $25.83. I plan to hold on to it. I may even buy more shares. I believe GE’s share-price will reach $38 by the first half of 2016.

If you have any questions, feel free to contact me, and/or leave comments. Thank you.

UPDATE: Click http://www.outofwacc.com/ges-slight-positive-earnings-report-and-its-about-to-change/ or click here.