GoPro Inc.: Positive Headlines Can’t Save GPRO Stock

Of the many companies that have launched their initial public offering in recent years, GoPro Inc. (NASDAQ:GPRO) seems to be the most schizophrenic. The magnitude of the camera maker’s enormous popularity is matched only by the volatility of GoPro stock in the markets.

GoPro Stock: Positive Headlines Can't Save GPRO Stock

The company hopes that two headlines — a partnership with energy drink maker Red Bull and a JPMorgan upgrade — will lift GPRO out of the doldrums. Since mid-May of this year, GoPro stock is up 16%. But is that enough to bolster confidence?

Without trying to come off as a “negative Nancy,” it’s hard to justify the risk in GPRO stock outside of a short-term trade.

While GPRO has shown strong momentum over the last month, it’s to be expected. Frankly, after shares have already been pummeled 41% year-to-date, the upside should be greater. GoPro stock carried a 44% short interest at the beginning of the year, which fell to 27% at last count.

The resulting short squeeze alone could have done more for bullish speculators.

It’s also tough to view the newsreel as a sustaining force for GPRO stock. Make no mistake — GoPro being awarded the status as the official action camera of Red Bull’s sporting and media events is a big deal. However, it’s not something that Wall Street cares about.

Why the Headlines Won’t Save GoPro Stock

Case in point comes from rival camera manufacturer Sony Corp (ADR) (NYSE:SNE). Sony’s film, “The Shallows,” opened to both a better-than-expected ticket haul, and generally positive reviews. Sharp-eyed critics did cynically note the frequency of product placement.

Yet, one element was curiously conspicuous. Rather than feature Sony’s own Action Cam in “The Shallows,” the producers instead opted for a GoPro camera! For a company to give free marketing to a competitor leads to one damning conclusion — GPRO is simply in a non-profitable industry.

That casts a cloud on JPMorgan‘s positive assessment. The bulk of their bullish argument is that inventory levels in the second quarter of fiscal year 2016 will be less than previously anticipated thanks to higher sales. However, that’s a rather poor consolation considering that day’s inventory jumped 66% year-over-year in Q1.

Investors also need to  review the gross margin for GoPro stock carefully. Over the last five years, gross margin has steadily declined to 43% from 52%. Worryingly, in the previous two quarters, the gross margin growth rate averaged -33%.

That means in order to generate sales, the company has been forced to cut pricing and put up profit-killing promotions. With earnings growth being the Achilles heel of GPRO, things aren’t looking rosy heading into Q2.

On a slightly more positive note, the drone industry is expected to skyrocket over the next several years. That obviously provides an opportunity for GPRO, which is releasing its drone camera called the Karma. The issue, of course, is that the same opportunity is extended to everyone else.

The difference this time around is that they are following the trend. That may not sit well with Wall Street. If the Karma bet doesn’t pan out, you can expect GoPro stock to bear the brunt of the damage.

Bottom Line for GPRO Stock

At the same time, it’s hard to tell if the bottom is in for GPRO stock.

Gopro stock, GPRO
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Source: Source: JYE Financial, unless otherwise indicated

After shedding more than 70% since its IPO, the contrarian argument would state that the selloff is overdone. Yet GoPro stock has been a consistent winner — for the bears.

Since my last write-up for the embattled organization, GPRO has lost 26% in the markets. Before that, I warned about “fierce price-cutting competition.” At that time, GoPro stock was trading at around $33 a pop. You can do the math.

Unfortunately, no matter what the news cycle states, it continues to be the same story. Their products, as great as they are, no longer carry the “wow factor.”

Unless there is a compelling reason to buy a GPRO camera, there are plenty of lower-priced alternatives. And jumping into the drone circus only exacerbates this issue. A flying camera is a flying camera. The differentiation is most certainly going to be in pricing. That makes GoPro stock even less enticing given its inventory hangover.

At this stage of the race, investors will want to be extremely careful with GPRO stock. Shares can easily pop up for a number of crazy — and not so crazy — reasons.

That said, the longer-term picture hasn’t really changed. The company is insistent on trudging it out against an increasingly higher number of competitors. Without the ability to charge whatever they want, it’s probably going to be a rough ride for GoPro stock.

As of this writing, Josh Enomoto was long SNE.

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