GoPro Inc (NASDAQ:GPRO) is popping on Monday morning amid a mostly flat morning, with GPRO stock up 6% by about noon. However, this looks like little more than a technical pop — the fact is that GoPro’s long-term prospects are fraught with risk.
GoPro’s latest earnings report did show a few flashes, even if it wasn’t enough for Wall Street. What was more discouraging was the delusions that came from CEO Nicolas Woodman, who seems to think everything is on the right track. From the earnings call:
“Our first quarter performance marks a major step in GoPro’s turnaround, and demonstrates our commitment to achieve full-year non-GAAP profitability. When we last spoke on March 15, GoPro affirmed first quarter revenue would be at the high end of guidance. Today, I’m happy to report that year-over-year first quarter revenue grew by 19% to $219 million, candidly beating the high end of our guidance.”
He also noted that — based on data from NPD — that GoPro holds the top three spots for digital cameras (on a unit basis). He even talked up the strong momentum with social media engagement; thee company has added more than 10 million followers on Facebook and 12 million on Instagram.
They’re positive notes for GPRO stock, but they mostly distract from the far larger negative drivers. Let’s take a look.
#1: GoPro Is Niche
GoPro has been diversifying its product base, such as with drones and virtual reality. But those offerings look to remain a small part of total revenues for now.
The success or failure of GPRO stock still relies primarily on the core digital camera segment, so the upcoming release of the Hero6 will be absolutely critical.
Even then, it’s important to understand that the market opportunity for GoPro’s cameras are of a niche size. This is limited to action sports buffs, because for most people, an Apple Inc. (NASDAQ:AAPL) iPhone camera is enough to take compelling photos and videos.
Even then, GoPro still faces a highly competitive market that is dragging on pricing. Rivals include the likes of Canon, Fujifilm, Nikon and Olympus, not to mention the likes of Sony Corp (ADR) (NYSE:SNE) and Garmin Ltd. (NASDAQ:GRMN).
#2: Product Development
GoPro isn’t exactly a top executor. The company’s history is lined with several product flubs. For instance, during the all-important holiday season, the company’s manufacturing issues led to delays of the Hero5 Black camera. Also during this period, GoPro had to recall its Kamra drone thanks to power problems.
This led to a disastrous fourth quarter.
These product issues are nothing new. GPRO suffered a shutdown of its entertainment division, and the Hero4 Session was a dud because it never really offered anything new for customers.
In light of this, investors should be cautious about GoPro stock. Deep cost cutting at the company will make it increasingly difficult to develop and properly launch quality products while having sufficient resources for R&D and marketing.
#3: Balance Sheet
The ongoing losses are taking a real toll on the balance sheet, which carries a cash balance of roughly $75 million.
Consider that the cash balance is roughly $75 million. GPRO has indicated that the credit facility has $82 million available and there was also a convertible debt offering, which provided net proceeds of $92 million. But the margin for error is still fairly slim.
According InvestorPlace.com’s James Brumley:
“Moreover, GoPro lost $111 million on a GAAP basis last quarter, which was actually slightly more than the GAAP loss from the same quarter a year earlier. Assuming not much changes, trajectory-wise, GoPro is still going to run out of money again sometime in the third quarter.”
And even if the company’s sales recover and the liquidity improves, there will still likely be substantial dilution because of the convertible security.
Bottom Line on GPRO Stock
GoPro’s move today isn’t coming on any particular headline — the stock has merely been well-supported between $8.25 and $8.50, and is following up from last week’s bounceback with a thrust through the 20- and 50-day moving averages.
But while the bulls are enjoying a small victory today, this isn’t a gain on a new product launch, an updated analyst look at the financials or any real news that can sustain this optimism over the long haul.
GPRO stock is still a dog; today is just a sigh of relief.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.