After disappointing investors in three of its last four earnings report, GoPro Inc (NASDAQ:GPRO) is crashing to earth. The action camera company, which sold for over $80 per share in the middle of 2014, should hit $8 per share in March 6 trading after Goldman Sachs cut its rating on GPRO stock to sell.
The brokerage firm expects GoPro’s shares to hit $6.
At its present level, GoPro is barely holding on to the important $1 billion valuation, at $1.2 billion when it opened for trade. This for a company that had revenues of nearly $1.2 billion for 2016, with almost $218 million in cash on the books and no debt.
From a technical perspective, this looks like a stock you should buy instead of sell. Goldman’s call, however, is the right one from a public market perspective, and it is based on fundamentals.
A Saturated Market
The investment unit of Citigroup, which also has a sell rating on GoPro, says the market for its tiny cameras is saturated, and that it won’t return to breakeven for two years despite the company cutting expenses.
Goldman’s report predicts negative cash flow through the year, which may require it to tap its credit lines. It says the company is even overvalued relative to Fitbit Inc (NYSE:FIT) on a price-to-sales basis.
GoPro’s cameras were a slight improvement within a category with many incumbents, and those incumbents are now going after GPRO with less-expensive merchandise that is just as good. Samsung Electronic (OTCMKTS:SSNLF) and even Eastman Kodak Co (NYSE:KODK) — which still has a valuable brand even if the company itself is worth half what GoPro is — are both offering look-alike products to GoPro’s top-of-the-line cameras at one-tenth the price.
GoPro says it will be able to survive with better software, including mobile apps, an international focus and new hardware like its Karma drone, which is finally flying. But many analysts covering GPRO stock doubt whether the market is big enough for it to succeed.
Is GoPro Prime for a Takeout?
The latest downgrades had GoPro stock down almost 4% in premarket trade March 6, and once the market opens, it should fall further. GPRO could fall quickly, like a Karma drone that has lost its battery.
The question, then, becomes whether someone might want to buy GoPro at this lower level and build it back up with its own capital.
The list of buyers might start with Ambarella Inc (NASDAQ:AMBA), GoPro’s chip supplier, which beat earnings estimates for its January quarter in part on inventory sold to GoPro. But Ambarella itself is worth just $1.8 billion, and owning a user of its chips might frighten off others.
At least one writer has suggested that Snap Inc. (NYSE:SNAP), which went public last week and is now worth almost $35 billion, should buy GoPro. Snapchat is a picture app, thus Snap is a camera company, and GoPro would be dirt-cheap, the reasoning goes.
Failing that, one of its competitors could buy GoPro or it could seek a foreign buyer. It is trying to cut its software costs by building new operations in eastern Europe, and a Chinese hardware brand might take an interest.
The Bottom Line on GPRO Stock
Assuming falling knives will be grabbed by smart people is a little like trying to draw to an inside straight. It’s a mug’s game; a great way to lose money.
While it is possible that GoPro would be acquired, it’s unlikely at this point that the premium will deliver a profit for those who buy now. More likely, GPRO stock will hit the Goldman price target of $6, and the “premium” offered by buyers would bring a total valuation of $1 billion, which is below where it trades now.
This company does need to be taken back into the private equity market for a rebuild, but that doesn’t mean it’s a game the small investor should be playing. It’s a game for big speculators.
Unless you are ready to play for the whole company, this is not a game you want to enter.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.