As the year comes to an end, many investors are looking to make changes to their portfolios by selling big winners and losers. Those sales free up money to make new purchases with, leading to the question — “which stocks should be bought and which stocks should be avoided?”
Most investors would agree that the definition of a stock to buy is rather straightforward — an equity which, sometime in the near future, will increase in value at a higher rate of return than the S&P 500 (because if your goal isn’t to beat the S&P 500, than you should just be indexing and save yourself a lot of time and energy) or provide an above-average amount of income in the form of a dividend. Simple!
But, when it comes to stocks to avoid, the definition gets a little murkier because it’s not as easy as determining whether or not a stock is going to lose value … there are other considerations to think about.
You have to take into account the possibility of the stock trading flat for an extended period of time because, with limited investment assets, a zero-return investment is costing you money if other options were available. Furthermore, if a stock moves higher but trails the major indexes, again you would have been better off putting your money to work in other places.
With that all in mind, today we are going to take a look at GoPro (GPRO) stock and why it is on the list of stocks to avoid.
Analysts Aren’t Impressed by GoPro Stock
On its first day as a publicly traded company — June 26, 2014 — GoPro stock closed above $31 per share. Over the following months, GoPro stock closed as high at $93 per share, in September and October of 2014. Since then, aside from a rebound in August when shares hit $63, it has been all downhill.
GPRO currently trades at just $18 per share, and it appears there aren’t very many catalysts that will be able to dramatically change the tide.
Currently, the biggest issue with GoPro stock is that Wall Street has turned against the company. The latest analyst downgrade came from Morgan Stanley on Dec. 14. James Faucette, the analyst, cut his rating from “equal weight” to “underweight” and dropped his price target from $23 per share to just $12. Faucette made the change due to high inventory and GoPro’s fundamental problem of making the camera easy to use.
Morgan Stanley doesn’t believe GPRO will be able to unload its large inventory during the holiday shopping season, despite cutting the Hero 4 Session’s price in September.
The Morgan Stanley downgrade follows a Cititgroup downgrade, which cut its target price for GoPro stock from $75 to $22, and a Cleveland Research downgraded in August, which was prompted by increasing concerns about supply chain forecasts.
A Look at GPRO Stock’s Financials
But there are bigger issues with owning GoPro stock than what Wall Street analysts are saying.
First is the question of how big the specialty camera market really is. During the first nine months of 2015 GoPro has sold 4.58 million units. In 2014 GPRO sold 5.2 million units. In 2013 it was 3.84 million units, 2012 it was 2.31 million and in 2011 GPRO sold 1.14 million. That is over 17 million cameras GoPro has sold over the past five years.
First, that is a lot of cameras. But when we consider the number of people who will actually need a GoPro-style camera for capturing extreme situations, one would have to imagine the market is probably growing saturated. That may be why GPRO is now showing growing inventory numbers, ($289 million on Sept. 30, 2015, compared to just $153 million on Dec. 31, 2014).
Furthermore, with cell phone cameras and protective cases getting better and better with each new iPhone or Galaxy release, it is really just a matter of time until the action sports camera goes the way of the digital camera. And I think we all remember what happened to Kodak stock — something which could possibly happen to GoPro stock in the coming years.
While we are comparing the digital camera to a GoPro, one of the biggest drivers pushing consumers to stop using the digital camera, despite it being better quality than a cell phone camera, was the ease of use and accessibility. No need to carry multiple devices for the “in case you need it” moment — the cell phone is always in your pocket.
In addition to always having the device, Apple’s video editor is ten times easier to use than GPRO’s current software.
Lastly, in an attempt to make the GoPro camera more appealing to consumers, the company has begun making a drone/quadcopter so a GoPro camera can easily be used to take aerial footage.
The first problem is, again, how big will that market really be and is it enough to move the needle?
Second, it’s hard to argue that GPRO is not good at making really small, good-quality, durable cameras, but how good are they at making a drone? This idea sounds like a company grasping at weeds as it’s hanging over the side of a cliff.
From an investing standpoint, GoPro stock appears to be one you should avoid. Wall Street analysts are down on the company, which will limit the number of near-term buyers. Future revenue growth is a big unknown, while the financial picture of the company appears to be growing worse. Management has begun down what looks like a path of “di-worse-a-fication” in an attempt to diversify.
With that all being said, it is hard to say GoPro stock will fall from where it currently sits, but it wouldn’t appear the stock will move dramatically higher in the coming months, making GPRO stock one to avoid.
As of this writing, Matt Thalman did not own shares of any company mentioned. Follow him on Twitter at @mthalman5513.
