A fad stock like GoPro Inc (NASDAQ:GPRO) is an easy stock to get sucked into, and it can happen repeatedly if you aren’t careful. But all you need to do is look into its results and into its business, and it’s clear that GPRO stock is a sucker’s bet.
Yes, you might be able to trade GoPro here and there and make profits that way. But the action-camera market isn’t an investment, nor will it ever be. It’s a fad, nothing more.
It’s exactly the sort of thing my forthcoming stock advisory newsletter, The Liberty Portfolio, would avoid.
What do I mean by “fad stock”?
It’s shares of any company that has a nifty idea that catches fire, and can even burn for quite some time, but has limited utility because it doesn’t solve a wide-ranging problem.
Think about Crocs, Inc. (NASDAQ:CROX). It was a nifty idea. Crappy but colorful rubber shoes that you could personalize with pins. They fulfilled a certain style and functional need. The company still has a billion dollars in annual sales, but it doesn’t have any profit. It breaks even or loses money.
The stock went nuts after the IPO, split 2-for-1 and eventually made its way near $70 per share. But eventually it crashed, crept back up (but not nearly to its previous hype levels) and has slowly eroded over the past few years.
I expect the same thing will happen with GoPro stock.
Why GPRO Stock Is Screwed
GoPro has a nifty set of products that solves a limited set of problems. But there’s no longer any vision about what GoPro as a company can be. Sales fell by more ethan 25% in FY16, driving GPRO to an operating loss of $373 million. Interestingly, GoPro has almost the same revenue numbers as Crocs, but it has a massive R&D spend where Crocs does not.
The expense side of the equation is horrible. Q4 was actually the second best quarter ever for GoPro as far as revenues, and it still lost money on a GAAP basis. Even worse, Q1 projected revenue is about $200 million, down from $363 million in Q1 2015.
GPRO stock has fallen for many reasons, but I particularly worry about the negative free cash flow of $151 million in FY16 and only $218 million cash on hand. The equity is lousy, so a secondary offering is not going to happen.
GoPro does have a credit facility, though. And it’s restructuring to save $100 million this year. But to me, the question is: Why didn’t it save that $100 million years ago by creating a streamlined operation?
Could the Hero6 save the day? No. It’s just another camera. But even worse is what CEO Nick Woodman said in the conference call for Q4:
“As far as a roadmap goes, candidly we can’t disclose what our plans are for products or how they line up with each other …”
Uh. Wait. What?
Dude, it’s called “vision”. And if you can’t share it then you don’t have one.
GoPro does have two apps that don’t require GoPro camera, and I guess the idea is that users will sign up for a monthly GoPro Plus account subscription. But why would anyone do this for cloud storage when bigger and better companies already offer it?
OK, GoPro stock stinks as an investment. What about as a trade?
I think aggressive traders could grab a little upside here, but not much. Short interest is around 30%, so any great news could cause a squeeze. We actually saw GPRO stock run up from around $7.20 to $8.50 in mid-March on a quarterly update that was bullish.
I suppose you could nibble here and aim for $10, but personally, I would wait for a fall back to $7.50 or lower and try to squeeze out a buck or two.
But I wouldn’t wed yourself to this trade. There are better ones out there.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.