GoPro Inc. (NASDAQ:GPRO) is off about 75% from its August highs, and just set a new all-time low a few days ago. And unfortunately, it appears things are about to get worse before they get better for GoPro stock.
Morgan Stanley just downgraded GPRO stock, slashing its price target almost in half, down from $23 to $12 per share. Considering GoPro stock was around $19 when it last closed, that’s a huge vote of no-confidence — a prediction of over 35% in future declines.
It’s the latest in a long string of very bad headlines for GoPro stock investors, with the action camera company now significantly below its IPO price of $24 and a long way from reclaiming that level given the negative sentiment.
I wrote back in October that GoPro was in deep trouble after an ugly earnings report led to significant declines. But bad earnings were only the beginning of troubles for GPRO.
Here’s why no investor should be touching this stock right now.
GoPro Stock Is Doomed
We’ll start with third-quarter earnings for GPRO stock, since that’s a big reason this horror show started. GoPro posted profits of 25 cents a share on revenue of $400 million, vs. targets of 29 cents and $434 million, respectively.
That’s bad. And it’s only the beginning.
Margins: When GoPro slashed prices in September, there were fears it would damage margins permanently — those fears were most prominently voiced by a feature article in Barron’s. Not only did earnings validate those reports, but GoPro has continued to slash prices on its recently-launched Hero 4 Session camera in hopes of tapping into holiday demand. Looks like margin pressures are a sustained trend GoPro investors will have to live with, then.
Buybacks: When you’re an entrenched megacap, sometimes big buybacks make sense as a way to deliver shareholder value. But GoPro went public a little more than a year ago and is already planning on burning $300 million on buybacks — a figure that Evan Niu of The Motley Fool points out is just about what it raised in its IPO to begin with! Not only are buybacks a general sign of a company without direction or growth, but the quick nature of a buyback plan after IPO is a strange and disturbing development for GoPro during its tailspin.
Sentiment: If anything, Morgan Stanley isn’t piling on … it’s just late to the train with its downgrade. As InvestorPlace feature write Dan Burrows pointed out recently, RW Baird downgraded GoPro stock from “outperform” to “neutral” on weak sales growth with a target of $18. Before that, way back in October, Piper Jaffray also slashed its target on GPRO stock from $54 to $25. When you are setting new 52-week lows regularly and the analyst community keeps cutting its price targets in half, you’re in deep trouble.
Look, I dig GoPro products and the videos of skydiving and surfing and all that. But the sad reality is that gadgets like this get hot, then run into a wall as they begin to reach market saturation and increased competition. And as companies like GoPro look to get ahead in a tougher market, price cuts and margin pressure are the way of things.
The bottom line for investors is still the bottom line, and given underperformance on sales and continual price cuts that will erode margins, there’s little reason to take a flier on GPRO stock even now that it’s theoretically at “bargain” pricing.
Investors should not get sucked into GoPro here. Even if the company does juice short-term demand with its price cuts, the profit pressures are severe and barriers to entry for cameras like this are not very high.
Don’t try to catch a falling knife in GPRO stock here.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
