The media’s recent rhetoric on GoPro Inc (NASDAQ:GPRO) has been positive. Zacks recently noted its growth plans were on track, research outfit Tractica has reported drone sales are (no pun intended) taking off and JPMorgan opined in mid-June that GoPro’s second-quarter numbers may be surprisingly impressive. Put them all together, and what you’ve got is a pretty solid bullish case for GPRO stock.
Yet, even against a backdrop of all that optimism, red flags continue to wave mostly because GoPro has still yet to convince the majority of investors it’s on a path to profitability now that the action camera market saturation is coming into view.
Fans and followers (and presumably investors now deep underwater with their GPRO trades) will be quick to point out the possibility that the world has only scratched the surface of the need for action cameras.
The latest layer of evidence? Drone racing.
Yes, a literal speed contest of small flying aircraft. The races are … interesting to watch through the on-board cameras the drones carry, which put viewers in the driver’s seat of their favorite aircraft, giving the “sport” a lot more stickiness. If these events inspire more hobbyists to try it — whether part of on organized league or not — it could be big for GoPro.
GoPro investors will also cheer the recently announced bankruptcy of competing action camera maker ION, in that it removes a competitor from the playing field and, therefore, leaves more market share for GoPro to win.
There’s a flipside interpretation of ION’s demise though. That is, maybe there’s just not a big market for the things, including the really good ones.
Most people agree that a mountable action camera that can take pictures and make videos in amazing high-quality definition is cool. The segment of the public that cares enough to buy such a camera, however, has been limited.
But the delayed Karma drone will reignite love and demand for action cameras? Maybe. Or, it just may give a competitor like Xiaomi a chance to win all the camera-toting drone business from a small but impatient market for such devices.
Perhaps speaking volumes about the lack of upside GPRO stock offers: Invesco’s Wilbur Ross just sold all 43,000 of his shares of GoPro, booking a loss of nearly half a million dollars. He can afford it, but he could have afforded to wait it out as well. It’s an alarming case of a smart investor putting his money where his mouth is, locking in a loss in the process.
Where Does GPRO Go From Here?
So why is it that Ross would give up on GoPro when it’s seemingly got so much going for it now? Because it still has plenty working against it. And, it has got one huge headwind for which there is still no solution — what does the company do when it runs out of willing customers? GoPro has no real revenue plan once all the would-be action camera owners have their device, and the upgrade cycle slows to a near-halt.
It’s an issue not unlike the one Apple Inc. (NASDAQ:AAPL) has run into of late. While the company is still well loved, as are its iPhones, saturation has become a real problem. Sales of the smartphone fell for the first time last quarter, as the need for an upgrade has withered and the company has already addressed the bulk of its addressable markets.
Apple has a proverbial plan B, though. That is, it’s putting a serious focus on sales of apps and entertainment. Smart move, too. Much of that product base drives recurring revenue, and an attachment to those apps and services does inspire an upgrade once it’s finally time to buy a new i-device.
GoPro doesn’t have such a backup product; there are only so many ways to repackage a camera, no matter how great that camera is.
Those who know the company well will point out that GoPro is wading deep into video-editing and video-marketing waters, opening the door to new revenue streams. It hasn’t been a compelling venture and venue so far; nobody has their face glued to their video-editing software the way they’re buried in their smartphones.
Bottom Line for GPRO Stock
It’s a tough reality for loyal GPRO shareholders, who have presumed a great product inherently means a perpetually profitable company. It doesn’t.
The action camera market is a relatively small market, with limited capacity for second purchases and upgrades. Even adding video-software editing features and a place to share videos doesn’t justify the company’s $1.5 billion market cap … especially when revenue is already sinking like a rock. Q1’s top line was down 49% on a year-over-year basis. Q4’s top line fell 31% from the fourth quarter a year earlier.
Drones may give the company a one-off revenue surge, but as has already been the case, there’s no meaningful encore. Until there’s a reason to expect recurring growth — and there certainly isn’t right now — the occasional wave of bullish chatter doesn’t really help lift the stock for the long haul.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.