During its first quarter, GoPro Inc (NASDAQ:GPRO), which sells cameras, microphones, drones and related accessories to outdoor enthusiasts and adventurers (to help them “see life from a different perspective”), reported impressive sales growth of 19%. Unfortunately for GoPro stock investors, that’s about where the good news ends.
The rest is rather depressing for existing shareholders, though the future could end up brighter for investors going forward.
But for now, GPRO stock is saddled with losses, dwindling cash balances and little visibility on when profits might start coming in.
The net reported loss during the first quarter was $111.2 million, which was only slightly more than the first quarter of last year (strangely — along with the sales boost — the company showed this as positive growth in its earnings release). The earnings loss was the same in both periods (this year and last year), or $0.78 per diluted share. Shares outstanding rose almost 4%, which is actually OK when a company is losing money because it spreads it out against a larger shareholder base.
GPRO Hasn’t Looked Pretty
Since inception, GoPro stock owners have little to cheer about. Since the company was founded (in 2002 by Nick Woodman, who left a start-up he founded to essentially go surfing and ended up developing a camera to record his action), it has collectively lost $370 million. So while the underlying customer base enthusiastically uses Hero5 Black, the Karma with Hero5 camera drone and earlier camera products, it hasn’t yet turned into a profitable enterprise for investors.
Cash is also dwindling. When I covered the stock last fall, cash on the balance sheet was around $275 million. As of the recent quarter end, it had fallen to less than $75 million. Aware of this trend, GPRO recently issued $175 million in convertible notes. That buys it plenty of time, but will either eventually have to be paid back, or will dilute shareholders if converted into stock.
There is still clearly potential for GoPro to evolve into a profitable company. Its Instagram followers recently jumped 44%, though to “only” 12.7 million followers. Its Facebook video views increased 22% to 35 million. It also boasted that GoPro “ranked #6 coolest brand out of 122 companies in teen study commissioned by Google.” So while definitely cool, it doesn’t necessarily translate into higher product sales — or cash flow
The launch of a Fusion spherical camera sounds promising, and international growth is a real bright spot. Sales outside of the U.S. grew to 60% of first-quarter sales and continue to grow briskly in China, Japan, and many major countries in Europe. And with firms including Facebook Inc (NASDAQ:FB), Twitter Inc (NYSE:TWTR), and Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) looking to boost live streaming and video fees, GPRO could end up being a huge beneficiary.
Bottom Line on GoPro Stock
GoPro also spends heavily on research and development: R&D was $359 million for all of 2016, or 30% of total sales of $1.2 billion. Without it, the company would have almost been profitable, but it definitely makes sense to try and boost sales with a new product with the potential to take off and meaningfully boost the user base.
The company fully admits that it needs to be more efficient to boost profits. This will consist of lowering its cost structure, such as through a “flatter, more efficient global organization that will allow for improved communication and alignment among our functional teams.” Proper attention to R&D, marketing and growing the international market remain key for GoPro stock.
Until cash flow trends improve, I suggest remaining on the investment sidelines. Free cash flow was actually positive in 2015 ($106 million, or $0.72 per dilute share) and 2014, but fell off a cliff last year (negative $150 million). If that continues, the company will eventually go out of business and leave GPRO stock owners dry.
Since its inception, GoPro hasn’t yet proven that it is a viable company. Its camera-based products are revolutionary and well received among adrenaline junkies, extreme-sports enthusiasts, and a wide array of professional and amateur sports athletes. But until its products are more fully embraced by a wider mass audience, operating losses are likely to continue. That’s a real buzz kill for those of us watching the GPRO stock price.
As of this writing, Ryan Fuhrmann owned shares of Alphabet and Facebook.
