If there was any chance GoPro Inc (NASDAQ:GPRO) might be able to restore credibility with investors, it just fell out of the sky and crashed into the earth… literally. The maker of action cameras announced earlier this week it was recalling the first batch of its ballyhooed Karma drone just two weeks after it debuted. Already down 41% from its October high and off 84% since its peak in mid-2015, GoPro stock is less likely to recover now than it has ever been.
That’s an alarming assessment to current owners of GPRO. It’s not a unique one though. It is possible for a company to sink so deep into its own quicksand that it can’t be pulled out.
Karma Can Be a #@!$%
The announcement was made on Tuesday — after several of its aerial drones lost power in mid-flight, GoPro announced it was recalling approximately 2500 Karmas. The company was offering outright refunds rather than replacements, suggesting it doesn’t have accessible inventory in its possession right now.
It’s not the first time owners of GPRO stock have been on the receiving end of product-availability problems.
A week ago the organization issued a concerning contraction of its holiday sales guidance, in the form of lowered full-year guidance. GoPro had previously forecasted a top line of $1.5 billion for 2016 (and has produced $645 million in revenue year-to-date), but lowered that outlook to a range of between $1.25 billion and $1.3 billion.
That revised outlook implies a Q4 sales expectation of between $600 million and $650 million, versus an analyst consensus of $609.4 million.
GoPro specifically cited a production bottleneck for both the Hero 5 camera and Karma drone as the reason for the lowered outlook. Not everyone is convinced the issue is now entirely on the supply side, however.
R.W. Baird analyst William Power is one of those doubters. So too is Bank of America analyst Jason Mitchell, who downgraded GoPro stock from a “Buy” to an “Underperform” earlier this week following the company’s disappointing Q3 earnings report and full-year outlook. He explained:
“GoPro encountered manufacturing issues on the Hero5 Black and the Karma Drone and was unable to ship enough Hero5 black units at launch. These operational issues hindered crucial new product launches and potentially endanger holiday sales with its fan base, retailers, and new consumers.”
The absence of a Karma on store shelves this holiday shopping season may well mean consumers buy a competing product instead.
Karma Headwinds are a Microcosm
Sadly, GoPro stock holders are no stranger to setbacks.
Since the last quarter of 2015, investors have been forced to digest five earnings shortfalls in six consecutive quarters. During that time, shareholders have seen four straight quarters of declining year-over-year quarterly sales, and have seen the company swing from a small gain of 24 cents per share in the second quarter of 2015 to a sizeable loss of 74 cents per share of GPRO for the third quarter of this year.
Analysts collectively expect the company to post a profit of 31 cents per share of GoPro stock for the quarter currently underway on a 39.6% increase in sales. Such a bottom line would be a drastic improvement in the loss of eight cents per share booked in the last quarter of 2015. As has been demonstrated though, analysts have been overshooting, and that outlook may not yet fully reflect the company’s recently lowered revenue guidance.
On a larger scale, the very premise of the company and pricing of GPRO stock is fundamentally flawed.
Commentator Jim Cramer may have summed it up best by opining in the wake of its recent earnings report “Now GoPro will exist, and Fitbit will exist. But it turns out that they were commodity companies.” In other words, there is no particular competitive edge or patent protection GoPro could use to stave off newcomers to the action camera or the drone market.
The company’s chiefs also have to embrace the reality that while most agree action cameras are clever, most consumers aren’t interested in owning one.
Bottom Line for GoPro Stock
There are still some vocal supporters of GoPro, amateur and professional alike. Those ranks are thinning out though, and they’re not quite as vocal as they used to be in the shadow of constant snafus from the company and decided weakness from GoPro stock.
Since October last year, GPRO stock has been downgraded eight times, and barely rates above a “hold”… a virtual “sell” from a perpetually optimistic analyst crowd.
Without much (if any) analyst support to use as a foundation and no reason to think the company will return to profitability soon — if ever — the vultures are starting to circle.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
