September is going to be a hot month for product releases from two companies: Apple (AAPL) and GoPro (GPRO). Both companies are prepared to unveil new products this month.
Apple will be up first with the iPhone 7 and Apple Watch 2. Both products are expected to be revealed tomorrow, September 7, along with software updates, so pay attention to AAPL stock over the next few days.
GoPro will release its Karma drone and Hero5 camera on September 19. New software is almost surely to be revealed at the same time.
Apple’s new product releases are always closely watched. And it’s virtually guaranteed that these products will sell reasonably well over the coming year, with the possible exception of the Apple Watch 2. By many accounts, the first watch was a disappointment. Perhaps that’ll change with round two.
I need to state a few caveats before comparing the two companies.
Today’s high-end smartphones have much wider appeal and more varied uses than a drone or high-end action camera. So GoPro’s products cater to a much narrower swath of potential customers than Apple’s. But given GPRO’s high-profile rally, and epic crash after failing to impress the market with last year’s introduction of the Session camera, I think there are a lot of non-extreme action folks watching the stock closely. GPRO trades over 35 million shares weekly, which is extremely high volume for a relatively small company.
Apple, obviously a large cap, has a market cap of $578 billion, whereas small cap GoPro weighs in at just under $2 billion.
They’re in totally different leagues. But both names are well known across the country, if not most other areas of the world. Both have a solid user base of hard-core fans, a wider user base of casual users and a sizeable population of haters. And both are consumer electronics stocks that have very closely watched major new product releases this month.
So my question for you is this: If you had to buy one of these two stocks today, which one would you rather buy?
Let’s break it down.
What about new product introductions?
This is a huge consideration. This month’s new products will drive projected revenue and earnings for both companies. I like Apple’s products, but I’m not a super fan (I still use an iPhone 4, which is on its last legs). I’ve never used a GoPro product, but have to admit to wanting a video camera with similar qualities (waterproof, works in cold weather, high definition, durable, etc.) for filming family adventures where the iPhone isn’t an option or the risk of damage is just too high. I could be a potential buyer of either company’s products this year, given how outdated my current equipment is.
Both companies are doing a very good job of keeping a lid on any leaks. But informed rumors point toward a number of likely hardware improvements for the new products.
GoPro’s Karma drone will be competing with DJI and Parrot, and to do so effectively, a comparably small form factor, especially when packed away, would be a plus. Flying a preset flight plan, obstacle avoidance and drone tracking are must-haves. Standout features could include an integrated camera and/or ability to carry GoPro’s Omni 360-degree virtual reality six-camera rig. The Hero5 could include GPS, a smaller form factor and a touchscreen. One would assume better software is part of the package. I’ve often wondered if a cellular connection and a few trimmed-down phone-like features, like messaging, could appear on GoPro’s cameras at some point.
Wouldn’t that help tilt the scales for the millions of potential users who could leave the cellphone in the car? I don’t think a cellular connection will appear this September, but wouldn’t be surprised if it did within three years.
The iPhone 7 is rumored to have a number of notable hardware improvements. At the top of the list is no headphone jack, which would make the phone 1mm thinner. The lightning port will be used instead, or lightning earbuds. The phone could also be water resistant, much like the Samsung Galaxy S5 and Sony Xperia Z3. The Apple Watch 2 could be water resistant too. It could also have a GPS, barometer and higher capacity battery. Doubtful it will have a cellular connection, but that’s probably a given at some point.
What about revenue growth?
Apple’s sales are expected to shrink by 8% this year, then grow by 4% in 2017. That’s not very exciting.
GoPro’s sales are expected to shrink by 14% this year. The current quarter (Q3) should be the last one to show revenue contraction (estimated at -21%). In the all-important Q4, revenue is expected to be up 54%. That momentum should carry into 2017 when GoPro is expected to grow revenue by 22%.
Winner: GoPro. I’d prefer to own a stock growing by 22% than 4%, all else being equal.
What about earnings growth?
Apple’s earnings are expected to shrink by 10% to $8.26 per share this year. Then grow by 8% to $8.91 per share in 2017. Again, not very exciting. But the level of profitability, and consistency over the long-term, is impressive.
GoPro’s earnings are expected to fall from $0.76 per share in 2015 to -$1.08 per share this year. That’s an ugly decline of 242%. They are expected to grow by 68% to -$0.35 in 2017. That’s an improvement, but it’s still a loss. It is notable that analyst estimates are all over the map; the high estimate for 2017 is $0.80, while the low estimate is -$1.08.
Winner: Apple. This category goes to Apple given positive earnings, and the relative certainty of earnings growth. On the other hand, the wide range of estimates for GoPro illustrates the current reality—nobody really knows what’ll happen! That uncertainty could mean massive upside if the company beats expectations. Another consideration: GoPro’s massive rate of expected earnings growth (68% in 2017) is vastly superior to the gently lullaby of Apple’s 8% earnings growth.
What about valuation?
AAPL stock trades at 12-times 2017 estimated earnings. It carries a price-to-sales (PS) ratio of 2.6, and an enterprise value-to-revenue (EV/revenue) ratio of 2.7. GoPro’s forward P/E is worthless given negative projected earnings. It carries a price-to-sales (P/S) ratio of 1.6, and an enterprise value-to-revenue (EV/revenue) ratio of 1.4.
Winner: GoPro. This is clearly a subjective measure (aren’t they all?) given that there’s no “best” valuation metric, and it’s not clear if a higher or lower valuation is better or worse. It’s all contextual. Given that I’m evaluating two stocks that I consider unloved right now, I think the comparatively undervalued stock with faster expected revenue and earnings growth wins. Isn’t it better to pay less for a faster growing stock all else being equal?
What about the charts?
Neither stock’s chart looks particularly good over the last 12 months. Shares of AAPL stock are 12% off their 52-week high. Over the last year, they’ve traded in a range of 90 to 124. The general trend has been bumpy and down, with a recent rally off 92 that came close to breaking resistance at 112, but stalled out at 110. The six-month chart (shown below) is murky, and seems to reflect the fundamental trend of quarterly revenue and earnings contraction.
GPRO stock’s trailing 12-month chart looks ugly, with a decline from around 40 to less than 10 (in May) suggesting most investors were scared away. It’s 64% off its 52-week high. One encouraging aspect of GoPro’s chart is the long, drawn-out tail that began in January; since then, it’s traded in a range of roughly 9 to 16. The six-month chart (shown below) looks better. Since May, the stock is up by over 50%. It’s back above both its 50- and 200-day moving averages, which hasn’t been the case since August 2015.
Winner: Tie. Neither stock has a particularly great-looking chart. The timeframe viewed definitely matters. AAPL stock undoubtedly gets the nod on a long-term chart. But if you pull the window in to six months or shorter, I think GPRO looks better, mainly because the stock was recently able to break above its April high, something AAPL stock couldn’t do.
What’s most interesting though is what happens when we simplify things and put both stocks on one six-month graph (see below; GPRO is green, right scale, whereas APPL is blue, left scale). When you evaluate them this way, it’s a tie. They both look almost exactly the same!
Which, if either, do you buy?
Neither one of these stocks is a slam-dunk right now. The reality is that the market’s perceived impression of new products will likely drive the respective stocks through the end of the year.
Then confirmation of their relative popularity will decide what happens in the first half of 2017. AAPL stock carries considerably less risk given the likelihood of at least coming close to expectations (a complete failure to impress is almost off the table).
Conversely, there is a ton of uncertainty surrounding GoPro’s new product releases. The drone is a new category altogether, and the last new camera (last year’s Session) was a total flop. After that performance, the pressure is on for the Hero5 to be more than an incremental improvement to the Hero4, especially after a two-year wait. That creates a lot of pressure. But, this company did create an entirely new category of camera, so is it fair to write them off because of a couple of missteps?
I can’t help but compare GoPro’s debacle to what Netflix’s (NFLX) management did back in 2011 when it introduced a horrible new pricing scheme. That ticked off just about everyone in the world, including shareholders. Netflix’s stock cratered from a high over 40 to a low under 10 in less than five months, a 75% decline. But Netflix got its act back together in 2012. And the stock went on to rally 1,200% by the end of 2015.
That’s what happens when a good company screws up, but then rights the ship. The analogy isn’t perfect, but I think GoPro has very significant upside potential if it executes over the coming years and investors look out to 2020.
All things considered, I prefer GPRO stock over AAPL stock right now. My bias toward small cap stocks over large cap stocks should be noted. As should my risk tolerance, which is probably higher than the average investor’s. I also have to admit to having a vested interest. I already own shares of GPRO stock, and don’t own shares of AAPL stock.
My favorite stock right now isn’t Apple or GoPro, however. It’s a virtual banking stock that, unlike AAPL stock or GPRO stock, has a consistent track record of revenue growth. This company’s revenues have grown by an average of 41% over the past five years. And over the past four quarters, revenue growth has averaged 37%. The six-month chart (below) looks a lot better than either Apple’s or GoPro’s.
This is the type of stock I add to Cabot Small-Cap Confidential 2.0 every month—rapid growth, great story, solid chart and huge potential. We have 7 double-digit winners year-to-date, with one stock up an impressive 100%. So don’t miss out on future fast-growing small cap stocks.