GoPro Inc (GPRO) just had a “Lazarus” moment in the markets mid-week, but will it be enough to push the company higher still?
After tumbling virtually nonstop since the summer of last year, GPRO finally began to show signs of life this February. On Wednesday, GoPro shares popped up 20%. Danny Coster — a prodigious product designer — jumped ship from Apple Inc. (AAPL) and into the eager arms of GoPro. It’s hoped that Coster will reinvigorate sales — and thus, GPRO shares — but is this a turning point, or a one-off deal?
Although the latest swing in GPRO is unequivocally good news, investors are right to be concerned. GoPro is following a nasty trend among recent initial public offerings — catapulting to a phenomenal start, and then petering out with a muffled whimper.
Price Action in GPRO Stock
In 2014, GPRO was on track to triple-digit share prices. Just two months ago, it was flirting with penny stock territory. Even with Wednesday’s surge, GoPro stock is down 23% year-to-date.
Proponents will undoubtedly note that since hitting bottom in early February, GPRO is up 41% in the markets. Shares are also moving within a higher-rising trend channel — ordinarily, a bullish indicator.
That said, look at the short interest for GoPro stock. In the one-month period following Jan. 29, the short interest dropped from 42% to 26%.
In order to exit a short position, borrowed shares used to initiate the bearish trade must be bought back. That naturally drives up the price, which explains a good chunk of the resurgence of GPRO.
It’s also reasonable to believe that the shorts panicked when GoPro announced its key personnel acquisition. The trading enthusiasm for GPRO the day after is well off the initial bullishness. This suggests that technical factors, more than the fundamentals, are the driving force behind GoPro stock.
That point is articulated when you consider how Coster will benefit the action camera maker. Yes, he will obviously improve upon the GoPro chassis, making it sleeker and lighter. But product design was never the flaw with GoPro! In fact, one can easily make the argument that design is the company’s strength. The litany of copycat products is a testament to the pioneering spirit of GoPro.
Either way, it’s hard to screw things up with action cams. There’s only so many ways to dress up a rectangle.
No, the biggest problem with GoPro is market saturation. Electronics experts like Sony Corp (ADR) (SNE) and Panasonic Corporation (ADR) (PCRFY) are churning out their own action cam variants — and at more attractive prices.
Adding to the pressure are lesser-known outfits that are bringing not only competition by numbers, but also by differentiation. A popular alternative to the action cam is the sunglasses cam. Needless to say, this would be a far less intrusive option than to strap a camera on your head.
GPRO is certainly not taking the market saturation issue lying down. Just recently, GoPro head Nick Woodman announced the acquisition of video-editing apps to remedy a cumbersome user experience. It was a costly purchase that was arguably necessary for the company to differentiate itself.
But the reality is that the direct competitors for GPRO can do the same thing. Sony in particular has a product ecosystem that would overwhelm anything GPRO can muster.
GoPro Needs to Find the Right Balance
But it’s not just about making a product unique. The real challenge is delivering the right mix of functionality and desirability to move sales. That is where GoPro stock is especially vulnerable.
For all its talk and acquisitions, GPRO has recently been a disappointment in both the top line and the bottom. Although its earnings for the fourth quarter of fiscal year 2015 was expected to be soft, revenue dropped 31% year-over-year. That just can’t happen when you’re blowing up overhead costs by near the same margin.
The message here is that the low-hanging fruit is gone.
That’s not a problem when you’re Apple and can rely upon a vast product portfolio … but GPRO isn’t AAPL, and that’s what the smart money is worried about.
The valuation for GoPro stock against its earnings — both of the trailing and forward variety — is still off-the-charts crazy despite the discount in the markets. It will get even richer as sales and expenses move in opposite directions.
Bottom Line for GoPro Stock
GoPro has generated plenty of exciting news, and on the surface, it appears that a resurgence is on. Even Wall Street — previously a GoPro hater — is jumping in on the action and giving GPRO stock a much-needed lift in the markets.
However, an examination of the details reveals that this is more window dressing than anything else. GPRO has a number of fundamental and competitive issues that are seemingly getting worse.
Until the company directly addresses the core problems, GoPro stock likely won’t be the hero it’s advertised to be.
As of this writing, Josh Enomoto was long SNE stock.
