Last Monday, GoPro Inc (NASDAQ:GPRO), which sells mountable and wearable cameras to sports enthusiasts and other active individuals, officially unveiled a product it hopes will reinvigorate the entire company — the Karma drone.
The drone represents a break from GoPro’s Hero line of cameras, but is a complement to its existing products and still meant for on-the-go users. It fits easily into a backpack and, for a couple of hundred more dollars, comes with a Hero5 camera.
GoPro also introduced its Hero5 Black and Hero5 Session. The devices boast more online connectivity, remote- and voice-control options, high-definition (“4K”) recording and enhanced features for more professional camera users.
The Karma drone is just being released for sale, so the results of its success are still some time off. Hero5 also looks to be a minor evolution from past cameras, but has more online viewing and edit capabilities to help boost customer loyalty.
The rest of GoPro as it stands currently looks far less appealing — sales growth has evaporated and the company is currently losing money. The stock bottomed out at less than $10 per share back in May, though it has bounced slightly back to $15.
GoPro’s decline in fortunes has certainly startled investors — just over a year ago, its cameras were touted for their increasing popularity and the stock was riding high at close to $50 per share.
However, the company could be at an inflection point. Management is extremely hopeful that Karma and Hero5 will be well received by customers.
In this respect, GoPro’s past has very little to do with its future. This makes investing in the stock a risky proposition, but there is some hype to the stock right now that current investors hope will continue.
Overall Struggles for GPRO Stock
The current financial outlook for GoPro as a whole is rather depressing. Analysts project full-year sales of $1.4 billion, or a 14% drop from the $1.6 billion last year. The market is hopeful that sales will bounce back and reach $1.7 billion for all of 2017.
Analysts expect a full-year loss of $1.07 per share in 2016 and a relative improvement to a loss of 25 cents in 2017. The comparisons look awful — last year the company reported positive earnings of 25 cents per diluted share. The $1 in earnings per share in 2014 is a distant memory at this point.
Shares outstanding has increased steadily too. Back in 2013, diluted shares outstanding was less than 100 million and stood at nearly 140 million during the second quarter. More shares dilute earnings for existing shareholders, though perversely it helps spread losses across a wider base of investors.
Free cash flow was averaging over $80 million annually over the past three years, but seems to have reversed course. So far this year (through six months), the company has burned through nearly $100 million in cash from its operations. It also spent another $100 million on acquisitions.
The Positives for GoPro
Despite the near-term struggles, GoPro does have plenty of upside potential. Its high inventory levels do appear to be subsiding, and Karma could end up being a big winner. So could its new Hero5 cameras. These are not yet baked into most analyst projections.
In its latest conference call with investors, GoPro boasted it has embarked on the “largest introduction of new products in [its] history.” It is hopeful that the entire company will be back profitable during the fourth quarter.
The company is also making solid inroads to sell its products (and hopefully drone) internationally. Close to half of sales were outside of the U.S. during the second quarter. It sells four of the top five camcorders in Europe, is opening stores briskly in Japan, and a new sales relationship in India should boost sales further in a fast-growing economy.
China is one of its fastest-growing markets.
Sales volume jumped 150% online at Tmall and JD.Com (ADR) (NASDAQ:JD)
And though GoPro is burning through cash currently, it still had $275 million in the bank as of the end of its second quarter. Long-term debt is very manageable at about $40 million.
The Bottom Line
There is little denying the optimism surrounding GoPro right now. Earlier this month, the stock popped 15% on anticipation for the official release of Karma and Hero5.
Unfortunately, it is too tough to value the stock right now. Sales are falling, profits are nonexistent and there has been little in the way of quantifying what Karma and Hero5 could do to help the company reverse course.
Action-based cameras and drones are also only niche products. Most consumers are easily content with a camera attached to their mobile phones, including Apple Inc.’s (NASDAQ:AAPL) iPhones. But there is opportunity in this same market — GoPro cameras can be found at the local Sprint Corp (NYSE:S) and Verizon Communications Inc. (NYSE:VZ) stores
Of course there is opportunity if sales take off again and it flows down to profits. But right now, investors may want to wait for some sales statistics before committing to the stock. Who knows — the company could end up introducing easy-to-use drones to the masses.
As of this writing, Ryan Fuhrmann did not hold a position in of the other aforementioned securities.
