GoPro Inc (NASDAQ:GPRO) stock has settled down over the past seven months. Preliminary earnings results in mid-March rescued GPRO stock from all-time lows. But, since mixed results in the full report in early May, shares of GoPro basically haven’t moved.
That seems reasonably logical, actually. Intuitively, both the bull case and the bear case for GPRO stock make some sense. The bear case is obvious. GoPro has already crashed from near $100 to under $10.
The company has also made several missteps along the way. It’s been late to consumer drones, ceding the market to private Chinese company DJI. And, GoPro isn’t profitable, or even close to profitable, at least not yet.
In that bear case for GoPro stock, however, is a bull case. The Karma drone has been released, even if later than hoped. Management cut operating expenses substantially in 2016 and may be able to do so further. Analysts are expecting positive EPS in 2018, if only on a non-GAAP basis. And, management itself can be improved (in theory, anyway).
From here, however, the bull case simply isn’t strong enough. Management changes are unlikely. The drone opportunity may be lost for good. And, with GoPro still at least two years from driving the profit needed even to support the current GPRO stock price, there’s no need to jump in just yet.
I’m not ready to short GPRO stock — though many are — but GoPro remains a long way from a buy.
The Bear Case for GPRO Stock…
Management has been a huge problem for GoPro. The company simply didn’t have a plan to move beyond its namesake action cameras. When that market became saturated, revenue fell 27% in 2016.
When the company did release its Karma drone, it had to announce a major recall. The GoPro Fusion 360-degree camera finally has been released. But, Garmin Ltd. (NASDAQ:GRMN) is beating it to market. 360Fly, majority owned by VOXX International Corp (NASDAQ:VOXX), has been on the market for years. GoPro has had years of software problems and other issues that have hurt its brand and allowed competitors — notably DJI — to take category share.
After Ford Motor Company (NYSE:F) CEO Mark Fields resigned in May, InvestorPlace named 10 more CEOs who needed to go. GoPro CEO Nicholas Woodman was one of the 10. Woodman, at the moment, seems a classic case of the “founder’s dilemma” — an innovative thinker who struggles with execution. That execution hasn’t improved, yet, either. And, the problem for GPRO stock is that it needs to.
That’s because GoPro is unprofitable. Adjusted EBITDA was negative last year and again in Q1. GoPro is guiding for positive Adjusted EBITDA this year, but management problems suggest its guidance can’t be trusted. The company had to raise funds through a convertible bond offering this year, given the amount of cash it’s burned of late.
For GPRO stock even to stay at current levels around $8, GoPro has to grow. But how?
It’s way behind in drones. DJI is dominant, Garmin is coming in, and military drone manufacturer AeroVironment, Inc. (NASDAQ:AVAV) plans to enter the consumer space as well. Many potential action camera customers already have a GoPro, and replacement demand won’t create market growth.
GoPro is expecting double-digit revenue growth this year, but that would still leave the company short of 2014 levels. Sales growth likely will slow starting in 2018, and if that’s the case, GPRO stock appears to be in trouble.
…Leads to the Bull Case for GoPro Stock
The counterargument is that at least some of these problems are fixable. Management can improve. Certainly, Woodman is no Steve Jobs, but it took even that genius several years to turn Apple Inc. (NASDAQ:AAPL) into an execution powerhouse. The Karma drone is out. Fusion is in a pilot program. GoPro has a massive social media following, and a huge customer base to sell new products to.
Meanwhile, GoPro likely still has costs to cut. Non-GAAP operating expenses were almost 60% of 2016 revenue. GoPro expects that figure to fall to 24%-26% long term. Fewer recalls and better execution will help on that front, for sure. GoPro also is targeting 17%-21% Adjusted EBITDA margins, eventually. At current sales levels, that would suggest at least $200 million in Adjusted EBITDA. A conservative 10x multiple would value GPRO stock somewhere around $12, an upside of almost 50%.
It’s a classic turnaround narrative that shows just how much the sentiment toward GPRO stock has changed over the past few years. But, for a number of reasons, I’m not buying that narrative.
GPRO Stock Still Looks Overvalued
Even with cost-cutting, the expense targets require substantial revenue growth, and I remain skeptical that’s coming. GoPro wrote in its Q1 release that the Karma was the “#2 best-selling drone priced over $1,000 in the U.S. on a unit basis.”
That parsing of language shows the problem. In a very narrow and high-end category in one country, GoPro isn’t even in first place. And, with 60% of Q1 sales coming internationally, the “U.S.-only” stat looks even worse.
If Karma doesn’t work, GoPro is in trouble.
Meanwhile, Woodman controls the voting power of GoPro stock through a dual-class structure. GPRO stock bulls hoping for management changes still have to ride with a CEO who has led the poor performance of the last few years. And the turnaround narrative behind GoPro stock is belied by the fact that, cost-cutting aside, GoPro hasn’t shown any evidence of a turnaround.
The bull case for GPRO stock is simply too difficult, particularly considering a still-hefty valuation based on profit multiples. A lot has to go right for GoPro stock to rise, and given GoPro’s history, I have little interest in taking that bet.
As of this writing, Vince Martin had a long position in VOXX and no positions in any other securities mentioned.