GoPro Inc.: Sorry, But Drones Still Don’t Make GPRO Stock a Buy

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Is Apple (AAPL) really interested in buying GoPro (GPRO), as was rumored on Thursday, sending GPRO stock higher to the tune of 11%?

GoPro Inc.: Sorry, But Drones Don't Make GPRO Stock a BuyMaybe it is, and maybe it isn’t, but one thing’s for sure … if Apple is acquiring GoPro, it’s sure not because of the recent unveiling of the GoPro drone it’s calling Karma.

That’s not a theory many fans and followers care to hear regarding their floundering shares of GPRO stock, but that doesn’t make it untrue. Although the buzz surrounding drones in general — and the GoPro drone specifically — is getting quite loud, when all is said and done, there’s more bark than bite to drone-mania.

Introducing the GoPro Karma, New App

Although GoPro action cameras have been attached to remote-controlled flying drones for quite a while now, the company officially joined the drone race on Thursday by unveiling the aforementioned GoPro Karma … a quad-copter with what most think is a camera that can film with at least 2.5k resolution.

It’s certainly no mere toy, with an anticipated price tag of between $500 and $1,000. But, that’s not out of line with the price of quality drones, the transmitter to control them and a durable camera to attach to them.

The company also updated its iOS app, adding functionality that allows owners of an Apple Watch to control a camera from their wrist rather than a smartphone.

Users can even view pictures from the watch.

Both were exciting, but they weren’t the bulk of the reason GPRO stock soared on Thursday.

Apple a Suitor?

It was most likely just a coincidence that Apple was named as a likely buyer of — and good fit with — GoPro on the same day GPRO announced the new smartwatch-based camera control feature. Still, the market was quick to connect the dots and tout the technology as just one more piece of evidence the two companies would fit together well.

FBR analyst Daniel Ives floated the idea this time. Ives stated in a note to investors that:

“We believe an acquisition of GoPro would make sense for Apple; action cameras are uniquely positioned at the intersection of Apple’s smartphone, wearables, and multimedia offerings. Additionally, GoPro’s new product cycles could open the door to areas where Apple’s competitors are investing heavily (e.g., drones, VR), and Cupertino has been playing catch-up.”

The market took that ball and ran with it, singing praises of the potency of the potential union. Apple, however, has yet to comment on the prospect, and has expressed no particular interest.

Drones Are (Sort Of) a Flash in the Pan

While the idea of an acquisition or a buyout is thrilling to investors who’ve watched GPRO stock tumble more than 80% since October of last year, even Ives acknowledges he’s not aware if Apple is interested.

Translation: If GPRO stock is going to recover, it’s probably going to have to be built on a foundation of sales growth from the company.

That’s going to be easier said than done. While action cameras were all the rage a year ago in the wake of the release of the GoPro Hero 4 camera — right in front of the busy holiday shopping season — things have been a little lackluster this year. Indeed, sales have GoPro’s action cameras have been so stale so far this Christmas that the company has been forced to lower the selling price of the Hero 4 Session from $299 to $199. Now it’s half of its original price.

Few want to admit it, but the maneuver suggests that those enthusiasts who wanted a wearable camera, though rabid, were limited in number and have already made their purchase. Sales from here will be tougher to muster, particularly with Xiaomi, Blackmagic and Garmin (GRMN) all competing with lower-priced versions of an action camera.

That puts drones on focus as the next growth frontier.

It’s not a completely off-base target market, merging two hot trends into one. Drone sales are projected to reach an annual pace of $1 billion by 2020. The bulk of those sales are going to be driven by commercial drones, however, rather than the hobby-grade drones like the Karma.

There’s also the distinct possibility that the Karma will follow the same disastrous path the Hero camera did. That is, lots of people love the premise, but few end up actually shelling out several hundred bucks to own what is ultimately a toy for adults.

Even if GoPro were able to tiptoe into the commercial drone arena, as was the case with its cameras, competition will certainly pop up and crimp the drone growth so many are expecting from GoPro.

As a reminder, it was only a year ago FBN Securities analyst Shebly Seyrafi said, “If pricing becomes aggressive due to competition, that could hurt profit margins and the stock, but we’re not seeing that happen yet.”

The Hero 4 Session is now selling for half of its original price. It’s pretty safe to say margins are being hurt by aggressive competition.

Bottom Line for GPRO Stock

It’s going to be a tough reality for some current and would-be owners of GPRO stock to digest, but drones are plentiful, and so are action cameras. GoPro may have been the first major name to combine the two and put some marketing muscle behind that pairing, but it will hardly be the last.

The GoPro Karma isn’t going to be a game-changer.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/gpro-stock-gopro-karma/.

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