GoPro, Inc. (GPRO) and AeroVironment, Inc. (AVAV) are two prominent players in the drone market. GPRO develops and sells cameras, drones, and mountable and wearable accessories designed for use in activities ranging from action sports to professional videography. The company also offers mobile applications and software to enable users to edit, manage, and share their files. On the other hand, AVAV designs, delivers and supports a portfolio of robotic systems and related services for government agencies and businesses. The company supplies UAS, tactical missile systems, and related services primarily to organizations within the U.S. Department of Defense and to international allied governments.

Rising demand for drones in military and non-military applications such as agriculture, media & entertainment, oil & gas, insurance, logistics, mining, and construction has enabled the drone market to gain popularity worldwide. Also, the usage of drones in transportation and delivery, aerial spraying, and public space monitoring have increased since the onset of the pandemic, as it facilitates smooth and timely delivery while complying with the social distancing restrictions.

Drones and drone technology are also gaining traction primarily from military operations to gather intel, conduct important missions without risking human life and help detect threats in any environment. The global drones market is expected to grow at 3.9% CAGR and reach $5.44 billion by 2027. So, both GPRO and AVAV are expected to benefit from the industry’s long-term growth prospects.

While AVAV lost 27.7% year-to-date, GPRO has surged 25.1%. GPRO is a clear winner with 10.1% gains versus AVAV’s negative returns in terms of its past three month’s performance. But which of these stocks is a better pick now? Let us find out.

Latest Developments

On December 15, 2021, GPRO announced a downloadable camera update for its flagship HERO10 Black camera, enabling new features and recording options. The new features include support for GPRO’s Max Lens Mod super-wide-angle lens accessory, legendary in-camera SuperView digital lens at 5.3K60 resolution, and 24 frames per second video for film and television producers. GPRO expects to witness high demand for its HERO10 camera in the coming months.

On November 16, 2021, AVAV introduced the Mantis i45 N, a multi-sensor nighttime imaging payload compatible with its Puma small unmanned aircraft systems (UAS). Designed for a superior night and low-light performance, the new Mantis i45 N joins AVAV’s expensive Mantis product line of micro-gimbals delivering high-quality video and imagery downlink to UAS operators and includes an upgraded 5 MP monochrome low-light camera sensor and high-powered 860 nm laser illuminator. These imaging payloads are likely to witness high demand in the coming months, providing increased situational awareness and advanced threat detection in any environment.

Recent Financial Results

GPRO’s revenue for its fiscal third quarter ended September 30, 2021, increased 12.9% year-over-year to $316.67 million. The company’s gross profit came in at $138.05 million, representing a 39% rise from the prior-year period. Its non-GAAP operating income came in at $58.80 million, up 75.8% from the prior-year period. GPRO’s non-GAAP net income came in at $55.32 million, indicating a 78.2% year-over-year improvement. Its non-GAAP EPS increased 70% year-over-year to $0.34. The company had $296.36 million in cash and cash equivalents as of September 30, 2021.

For its fiscal second quarter, ended October 30, 2021, AVAV’s revenue increased 31.7% year-over-year to $122.01 million. The company’s gross profit came in at $42.46 million, up 3.9% from the prior-year period. Its adjusted income from operations came in at $14.51 million, indicating a 3.4% decline from the year-ago period. AVAV’s net income came in at $2.53 million for the quarter, representing a 20.6% year-over-year improvement. Its non-GAAP EPS increased 62.5% year-over-year to $0.78. The company had $104.77 million in cash and equivalents as of October 30, 2021.

Past and Expected Financial Performance

GPRO’s revenue and total assets have grown at CAGRs of 0.7% and 17.5%, respectively, over the past three years. The company’s tangible book value has grown at a 239.5% CAGR over the past three years.

Analysts expect GPRO’s EPS to rise 962.5% year-over-year in the current year and 10.6% next year. Its revenue is expected to grow 29.2% year-over-year in the current year and 7.2% next year. The company’s EPS is expected to increase at a 10% rate per annum over the next five years.

In comparison, AVAV’s revenue and total assets have increased at CAGRs of 11.1% and 23.9%, respectively, over the past three years. The company’s tangible book value has declined at a CAGR of 29.8% over the past three years.

AVAV’s EPS is expected to fall 31.4% year-over-year in the current year but rise 31.9% next year. The company’s revenue is expected to increase 15.6% year-over-year in the current year and 13.7% next year. Analysts expect the company’s EPS to grow at a rate of 18.2% per annum over the next five years.

Valuation

In terms of forward EV/Sales, AVAV is currently trading at 3.72x, which is 179.7% higher than GPRO’s 1.33x. In terms of forward EV/EBITDA, GPRO’s 9.55x compares with AVAV’s 26.31x.

Profitability

GPRO’s trailing-12-month revenue is almost 2.6 times AVAV’s. GPRO is also more profitable, with a 39.8% gross profit margin versus AVAV’s 36.4%.

Furthermore, GPRO’s levered free cash flow and return on equity (ROE) of 10.3% and 104%, respectively, compare favorably with AVAV’s negative returns.

POWR Ratings

While GPRO has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, AVAV has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.  

GPRO has a B grade for Value, which is in sync with its lower-than-industry valuation ratios. GPRO has a non-GAAP forward P/E ratio of 12.24, 11.7% lower than the industry average of 13.87x. AVAV’s C grade for Value reflects its slightly higher-than-industry valuations. AVAV’s 47.88 forward EV/EBITDA multiple is 138% higher than the industry average of 20.12x.

GPRO has a B grade for Quality, consistent with its higher-than-industry profitability ratios. GPRO’s 11.1% trailing-12-month return on total capital is 47.1% higher than the 7.6% industry average. In comparison, AVAV’s C grade for Quality reflects its slightly lower-than-industry profit margins. AVAV has a 1.7% trailing-12-month return on total capital, 75.1% lower than the industry average of 6.7%.

Of the 51 stocks in the C-rated Technology - Hardware industry, GPRO is ranked #16.

AVAV is ranked #51 of 72 stocks in the D-rated Air/Defense Services industry.

Beyond what we have stated above, our POWR Ratings system has also rated GPRO and AVAV for Growth, Momentum, Stability, and Sentiment. Get all GPRO ratings here. Also, click here to see the additional POWR Ratings for AVAV.

The Winner

As drones and drone technology gain popularity and high demand from various sectors of the economy, both GPRO and AVAV are expected to profit substantially in the coming months. However, relatively lower valuations and higher profit margins make GPRO a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology - Hardware industry, and here for those in the Air/Defense Services industry.

GPRO shares were unchanged in after-hours trading Tuesday. Year-to-date, GPRO has gained 28.99%, versus a 25.06% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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