GoPro Inc (NASDAQ:GPRO) launched its new Karma line of drones on Oct. 23, 2016, but quickly found itself against the wall. The company on Nov. 8 was forced to recall nearly all the 2,500 units it sold, leading to a big selloff in GPRO stock … but now optimism on the drone front has one analyst upgrading his price target on shares.
The reason for the 2016 recall was a small amount of drones unexpectedly came crashing down from the sky.
There’s the obvious worry about a company making a flying product that runs an increased risk of crashing down on a person or property. Flying a bit more under the radar is that the initial sales figures weren’t actually all that spectacular. While early adopters supposedly were rushing in to buy the drone, Karmas only accounted for a mere $2 million in sales.
Despite this initial embarrassment, though, GoPro is not only prepping for a relaunch of its drone, but it’s already readying a follow-up, the Karma 2.
I cautioned investors ahead of the drone launch not to expect much since the Karma wasn’t in the least bit competitively priced at $799 or $1,099 with a Hero camera attached. I noted the DJI Phantom 3 Quadcopter Drone can be bought on Amazon for less than $500.
The notion that GoPro’s drones were not competitively priced not only holds true today — it has gotten worse. Since GoPro’s recall, DJI not only lowered its prices, but the company implemented such a competitive pricing strategy that the cannibalization of its own products is an acceptable outcome.
Meanwhile, a national survey conducted ahead of the holiday season adds to an equally concerning picture about the state of the drone market. The survey was conducted by the Saint Leo University Polling Institute of 1,001 adults nationally from Nov. 27-30, 2016, and found that 84% of adults are aware of what a drone is — an increase from 78.4% a year ago. However, just 21.8% of those surveyed said they are very or somewhat interested in owning a drone — down from 35.1% a year ago.
This comes in the face of many research firms calling for a long-term healthy growth trend through at least 2020. If the drone opportunity is so strong, why were consumers incrementally less interested at a time of year when people would be focused on such discretionary purchases?
And how will GoPro sell 150,000 drones throughout 2017 — a figure that Brad Erickson of Pacific Crest said on Tuesday he believes is attainable?
Even if the analyst’s forecasts are accurate, he still places a $9 to $10 fair value estimate on the stock. That implied at best 7% upside from the time his note was released, and GPRO stock — which surged 10% on the estimate upgrade — has already surpassed that line in Tuesday’s trade.
GoPro Is an Action Camera Company That Sells Drones
I think investors looking for any sort of tailwind to help GoPro stock need to scratch that story and look at the main business: action cameras.
Unfortunately, GoPro’s core product line isn’t showing many promising signs, and most info available — GPRO doesn’t report its most recent quarter until Thursday, Feb. 2 — points to a poor holiday sales performance.
The fact that GoPro had to become extremely promotional isn’t instilling a lot of confidence. The company was selling a GoPro HERO Session Holiday Bundle package for $179. It originally was $249.99.
And that points us toward a good reason to be worried about GPRO stock gaining any momentum in the new year.
GoPro said it would achieve non-GAAP profitability in 2017. However, investors are known for punishing companies — especially already struggling ones — that fall short of promises of newfound profitability.
There’s a reason why GoPro stock didn’t participate in the “Trump bump” and is still negative over the past year despite a rip-roaring 20% run for the broader market: There’s nothing realistic to be excited about.
Positive analyst notes will get Wall Street excited and drive hopeful bidding by longtime bulls that have had little to chew on. But it’s only a matter of time before reality sets in again and causes investors to send GPRO to increasingly lower all-time lows.
As of this writing, Jayson Derrick did not hold a position in any of the aforementioned securities.
