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Why Depressed Valuation, Restructuring Make GoPro a Buy

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GoPro, Inc. (GPRO - Free Report) has been one of the worst performers in 2016, without a doubt. A litany of problems — some driven by market forces, others self-inflicted — hurt the company, resulting in the stock losing 52% of its value during the course of the year. Currently, the stock is trading at $8.58, which is near its 52-week lows.

We have a Zacks Rank #2 (Buy) on the stock. Let’s discuss the reasons why we believe this company is worthy of its rank.

Restructuring: Cost Streamlining & Job Cuts

Cost cutting has become one of the company's top priorities and the action camera maker recently revealed plans to do so by cutting 270 jobs. The company also assured that it would bring down operating expenses by over $200 million and return to EBITDA profitability in 2017.

This is certainly not the first time GoPro has turned to job cuts in an effort to slash costs. Last year, the company witnessed two rounds of layoffs, cutting 7% and 15% of its workforce in January and November, respectively.

We believe that GoPro will be able to attain these massive cost reductions, in light of its recent business restructuring, which did away with many high-cost operations, including its entertainment division.

Further, GoPro recently affirmed its Q1 revenue guidance to be in the upper end of the $190–210 million range and reiterated its target of full-year non-GAAP profitability.

Depressed Valuation

GoPro has been trading at very depressed levels. As you can see from the chart below, the level is near the company’s historic lows. If GoPro is able to carry through its restructuring and turn its fortunes around, investors who get in now — before these restructuring efforts are priced into the stock — will stand to make outstanding returns on their investment.

Zero Debt

GoPro has absolutely no debt on its balance sheet. As a matter of fact, in a recent press release, the company's CEO insisted that GoPro has no plans to draw on its credit facility. This dramatically reduces the financial risk of the company and also minimizes the chances of it shutting down its business.

Shift in Focus

From the company’s recent actions and the quarterly update, we have gleaned that GoPro has learned from its mistakes of going all over the place and losing focus of what made it a niche company in the first place. It is now going back to making hardware and software that enable people to capture great stories — something it does best.

In fact, the company has been increasingly aligning itself with the smartphone era. Consider the content creation war between Facebook and Snap (SNAP - Free Report) — it shows a secular trend toward individualized, social content creation. GoPro’s concept fits perfectly with this trend. However, the company’s products have failed to achieve mass traction in the absence of an effective sharing aspect — which is a key element.

Interestingly, GoPro is now working on making the smartphone the central focus of creating stories, which could help the company break out of its shell.

A Niche Market

The action sports camera space — a market GoPro created — is a relatively nascent one. But consider this — according to market research firm, Global Market Research, the action camera market size is projected to grow at a CAGR of over 22% from 2016 to 2023, and GoPro holds 50% of this market. Such a foothold in an expanding market indicates strong potential for revenue growth.

Analyst Estimate Revisions

GoPro has been witnessing solid activity on the earnings estimate revision front in recent times. Analysts have become increasingly bullish on the company, as the Zacks Consensus Estimate for 2017 trended up over the past month, narrowing from a loss of $1.09 to a loss of $0.47, thanks to five upward estimate revisions compared to none lower. That is a massive 56.9% upward revision to the 2017 earnings estimate.

GoPro, Inc. Price and Consensus

Summing Up

Near-term revenues are stabilizing,costs are coming out of the system and the company anticipates EBITDA to be positive for full-year 2017. Add to that a Zacks Rank #2 and bullish analyst interest, and the stock seems quite an attractive investment opportunity.

Considering the depressed current valuation, we believe that the prudent investor should get in now, before all these positives get priced in.

Other Stocks in the Space

Another similarly-ranked stock in the broader Consumer Discretionary sector is Activision Blizzard, Inc. . Activision has registered a remarkable positive average surprise of 33.9% for the four trailing quarters, driven by four strong, consecutive earnings beats. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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