GoPro Inc (NASDAQ:GPRO) is on track to end 2016 with a whimper, which is actually pretty good for a name that is rapidly falling apart. The company announced drastic new cost-cutting measures Wednesday, including laying off 15% of its employees. GPRO stock merely shrugged.
The market knows. After a couple of flops this year, any hope for a turnaround in GoPro’s fortunes has been pushed well into 2017.
If history is any guide, layoffs won’t make a difference. They’ll just prolong the pain. And so now it looks like the most convincing part of any bull case on GPRO stock is its appeal as an acquisition target. The business has deteriorated to the point that it’s reasonable to question GoPro’s ability to exist as an independent company.
Outside of a deal premium, it’s hard to find a catalyst for GoPro stock.
The Dead End That Is GPRO Stock
Analysts were cautious about GoPro’s most recent three-month period and still managed to be disappointed. The low bar they set didn’t help at all.
The company logged its fourth consecutive quarter of losses and missed Wall Street estimates in four of the last five earnings periods. As for the top line, revenue missed analysts’ average projection for the second time in the previous four quarters.
What’s happening is that the company’s fatal flaw is catching up to it. Ultimately, GPRO sells commoditized products. There’s no shortage of competitors that can make action cameras and drones. Some of them can even do so less expensively.
More troubling is that the market for these gadgets is simply too small. We’re talking about a niche market that is rapidly approaching saturation point. There are only so many people in the market for any consumer electronic gadget, and once everyone has one, the growth rate has to plateau.
As Josh Brown, CEO of Ritholtz Wealth Management, says, GoPro has the same problem as every consumer electronics story. It’s really hard to get people to buy a second one.
Manufacturers try to regularly juice sales through the upgrade cycle, but most users remain content for some time with the “good enough” gadgets that they’ve already purchased. After all, these are pretty pricey toys.
And as for drones? Same problem. There’s no shortage of companies manufacturing high-quality, GoPro-ready drones for a customer base that very much cares about price.
Just look at the raw numbers. For the third quarter, GoPro stock was hit by a net loss of $104 million, or 74 cents per share, from year-ago profits of $19 million, or 13 cents per share. On an adjusted basis, the loss came to 60 cents a share, which was far wider than the Street’s estimate for a loss of 34 cents, according to a poll by Thomson Reuters.
Revenue retreated 40% to $241 million from $400 million in the same quarter of 2015. Analysts’ average estimate pegged revenue at $319 million.
That’s a big bottom and top-line miss for GoPro, but what the market really cares about is guidance and that surprised to the downside too.
Bottom Line on GPRO
It has been clear for a long time that GPRO stock is a dog. It has no competitive moat and that is an existential weakness.
GoPro has been a publicly traded company for fewer than three years and it’s already become a turnaround play? That’s a big red flag in and of itself.
There must to be better risk-reward ideas you can stuff into your portfolio.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.