Lately, GoPro Inc (GRPO) shareholders have experienced something close to an action sport. But over the past month or so, things have settled down a bit and the company has caught a nice wave of buying: GoPro stock is up 21% since early February. However, this could be just a fake-out.
The fact is there are still serious perils for GoPro stock.
First of all, it’s important to realize that the sales have been in free-fall. In the latest quarter, revenues plunged by 31% to $436.6 million, and the loss came to $34.5 million or 25 cents per share. Note: This was for the all-important holiday season!
But the problems do not appear to be a one-time event. For the current quarter, GPRO expects revenues of $160 million to $180 million, well below the analysts’ consensus of $298 million.
GPRO has taken several actions to get some level of stability. For example, the company recently cut costs by reducing 7% reduction of its workforce. It also slashed prices on its latest devices to clear inventory. Finally, GoPro bolstered its software capabilities, spending $105 million for Stupeflix and Vemory (video editing has been an Achilles’ heel for GRPO).
But none of this may matter much for GoPro stock as the company still faces fierce headwinds. If anything, the GoPro product category may be mostly a narrow niche.
Questionable Longevity for GoPro Stock
Let’s face it, how many people really need a camera attached to their surfboard or helmet? And besides, for those who do, is there really a need for frequent upgrades?
Lately, it seems that the answers are not very encouraging.
Besides, even if the market potential is larger, there could still be bad news for GoPro shareholders. The reason is that, well, the company may violate one of Warren Buffet’s timeless principles — that is, a company needs a moat. This is a sustainable competitive advantage that is incredibly tough for rivals to crack.
According to Buffett:
“When we see a moat that’s tenuous in any way — it’s just too risky. We don’t know how to evaluate that. And, therefore, we leave it alone. We think that all of our businesses — or virtually all of our businesses — have pretty darned good moats. And we think the managers are widening them.”
In the case of GPRO, the moat is getting tenuous. For example, the market is awash with offerings from major operators like Canon Inc (ADR) (CAJ), Nikon Corp (ADR) (NINOY), Samsung (SSNLF) and Sony Corp (ADR) (SNE). Then there is buzz that others may enter the market like Apple Inc. (AAPL) and even Under Armour Inc (UA).
Given all this activity, the market is vulnerable to pricing pressures. After all, take a look at Activeon, which has a top-notch GPRO alternative that is on sale for a mere $91. The product currently fetches an impressive 4.4 star rating on Amazon.com, Inc.‘s (AMZN) product page.
Meanwhile, there are plenty of fast-charging startups making a play for GoPro, such as Fusar and 360Fly. These companies are pushing innovation with their smart editing, virtual reality connections and safety functions (for example, if you crash your bike, there will be an emergency call).
Bottom Line on GoPro Stock
It will take some time to get a sense of whether GPRO can make a turnaround.
Keep in mind that the next major launch of the core product — the GoPro Hero 5 — will likely not hit the market until October. A few months before this, there will also likely be the release of the Karma quadcopter drone product.
So far, the details are sketchy. But investors in GoPro stock should be wary. The last major product launch — for the Hero4 Session — was a disaster. The product simply had few features that compelled customers to pull out their wallets.
Oh, and what about the VR product? This may also be problematic.
According to a report from Oppenheimer analyst Andrew Uerkwitz, the technology already appears to be “obsolete.”
No doubt, as seen with other former darlings in the devices space — like Nokia Corp (ADR) (NOK) and BlackBerry Ltd (BBRY) — it can be extremely tough to recover.
The competition can get overwhelming and pricing pressures can wreak havoc on margins. Unfortunately, it looks like this playbook is also becoming a stark reality for GoPro stock as well.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
