GoPro Inc: GPRO Stock Rallies … But Will It Last?

GoPro managed to top estimates in its second quarter, but there's plenty more it needs to do before GPRO stock is a strong investment

GoPro Inc Earnings Show Why GPRO Stock Is a Sell

Source: ETC-USC via Flickr (Modified)

Struggling action camera maker GoPro Inc (NASDAQ:GPRO) might finally be turning things around. GPRO stock was up 4% after Wednesday’s bell — a sigh of relief after GoPro snapped its earnings losing streak.

GoPro reported revenue of $220.7 million for the recently completed second quarter, and posting an operating loss of 52 cents per share of GPRO stock. Analysts had been expecting a loss of 58 cents per share on sales of $194.31 million for the second quarter of 2016. GoPro had missed its earnings estimates in each of its prior three quarters. Looking ahead, GPRO offered 2016 revenue guidance of between $1.35 billion and $1.5 billion.

The relatively good results are sure to stir the pot for a perpetually drama-riddled GoPro.

How GoPro Got Here

GoPro’s cameras were all the rage in early 2014, fueling a huge rally between its July-2014 IPO and its October-2014 peak of $98.47. Since then, however, GPRO shares have fallen 89% as revenue took a sharp turn for the worst, and the company swung to a steep loss. In the first quarter of the year, sales fell 49%, and the Q1 2015 profit of 24 cents per share became a loss of 63 cents per share. Wednesday’s quarterly report was a continuation of that deterioration, but at least a pleasant surprise.

CEO Nicholas Woodman commented on last quarter’s results:

“GoPro is well-positioned for the second half of the year.  We now have a simple product line, a clean retail channel and clear indications of strong consumer demand. HERO5 and Karma will contribute to the largest introduction of products in our history, all in time for what we believe will be GoPro’s most exciting fourth quarter, ever — a quarter where we expect to return to profitability.”

Still, the company must learn to do more with less. Even against the backdrop of lower revenue, operating expenses grew from $148.2 million a year earlier to $202.4 million in Q2 of this year, suggesting the company has to spend big to maintain what sales it can.

And that may be a tall order. In July, GoPro action camera rival iON filed for bankruptcy. Though iON never even came close to the enjoying the market share GoPro currently has, it was the most direct competitor to GPRO, and suggests demand for action cameras as a category in itself is shrinking.

Still, GoPro is gaining market share for whatever market is still in place. NPD said that last quarter, the company’s unit share improved by 110 basis points  to 21.3%.

Better Cameras Will Boost GPRO Stock … Right?

GoPro continues to work toward making its action cameras more marketable by making them more functional, and giving current or prospective camera owners more reasons to use them.

One of those ideas is addressing the difficulty users found in trying to edit video filmed with GoPro action cameras. In February, the company spent $105 million to acquire startup digital-video editing outfits Splice and Replay. Since Splice and Replay’s Quik software became part of the GoPro family,  the mobile apps have collectively doubled their number monthly active users, to 3.7 million. 

The other aspect of GoPro camera ownership the company has only recently begun to address: What do videographers do with their digital films once they’re created? YouTube and Facebook are options, but the venues lack a feeling of community — and opportunity — for GoPro users. In response, GoPro has worked to cultivate a community of GoPro video makers and viewers, even ponying up $5 million worth of incentives to encourage great footage.

Replay’s Quik and the Splice apps have helped on that front, collectively doubling the number of uploads since doubling the number of users.

A Missing Horizon

Little about the company’s drone plans were discussed in the earnings press release, however.

In an effort to rekindle waning sales, in May of last year, GoPro announced it would begin making video-shooting drones sometime in the middle of 2016, tapping into a market expected to be worth more than $5 billion by 2020. Some believe the consumer drone market will grow at an annualized rate of 28% through 2022, with the bulk of them ferrying around some sort of video camera.

That’s a much-needed exciting prospect for GPRO stock, though not necessarily an opportunity that will salvage the company.

Price wars are one reason for the cap on the opportunity. Oppenheimer analyst Andrew Uerkwitz explains:

“While near-term headwinds may have subsided, GoPro is still subject to the structural decline in the consumer camera market. Additionally, the camera drone market is expected to see intense price competition from more experienced Chinese competitors.”

Time and technology could also work against GoPro’s drone ambitions, particularly in that the intended May launch of the so-called Karma drone was pushed back to the end of 2016 (though still in time for the holiday shopping season). Detwiler Fenton analyst Alex Arnold commented in response:

“Note that most drones have a primary use of flying cameras around, hence the inherent synergy with GPRO as a maker of cameras. Nonetheless, we are seeing a pricing rationalization and also technological innovation of this market underway that we believe will outpace GPRO.”

The delay has given competitors like DJI a chance to develop competitive camera-carrying drones at the $1,000-and-less price point at which the Karma is expected to retail.

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

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