The sale of drones for personal and commercial use is a big business that’s getting bigger. GoPro Inc (NASDAQ:GPRO) tried to muscle in on some of that revenue with the release of its Karma drone last year, but stumbled.
However, with recent security concerns over market leader DJI, the company has an opportunity. The question is, can the Karma drone take off before DJI addresses its issues and recovers?
If GoPro can successfully leverage the situation, the payoff for GPRO stock would be considerable.
DJI’s Security Woes
DJI has always had one strike against it, especially when it comes to commercial drone applications: it’s a Chinese company. This often raises red flags when it comes to sensitive data.
But the real trouble for the company began at the start of August when the U.S. Army released a memorandum directing its personnel to stop using DJI drones due to operational risks.
That came after repeated concerns had been raised about security holes in DJI’s software. There were reports that data collected by the drones could be accessed by hackers. Firmware modifications are also being sold that modify DJI drone firmware, allowing them to bypass no-fly zones. Exploits have also been discovered that could allow a remote user to physically take control of a DJI drone in flight.
Bloomberg reports that DJI has now launched a bug bounty program in an attempt to address those growing security concerns. However, the damage may have been done. With the military issuing directives against the company’s drones, consumers are taking notice. And commercial customers –who have a lot to lose if sensitive data collected by their drone fleet is compromised — have been spooked.
What Karma Drone Sales Could Do for GPRO
GoPro’s annual revenue for 2016 was $1.19 billion. That was down 26.8% from the previous year — a slide that was reflected in GPRO stock which dropped from a 2015 high of over $63 to under $10 when its 2016 yearly results were released in February.
The Karma drone is essentially a rounding error in those numbers. GoPro reportedly sold only 2,500 units before having to recall the drone in late 2016. That event slammed GPRO stock, knocking off 10% on the announcement. However, since its January re-launch, the $800 GoPro drone has sold well — or as well as any drone not made by DJI can — taking second spot in U.S. sales for its class.
Gartner is forecasting global drone sales rising 34% to over $6 billion in 2017, growing to over $11.2 billion by 2020. The breakdown is roughly $2.36 billion for personal drones (priced under $5,000) and $3.69 billion in drone sales to commercial customers.
In terms of competition, the field is wide open. 3D Robotics, once DJI’s biggest competitor for prosumer and commercial drones bowed out of the market in 2016 and is re-focusing on software. French manufacturer Parrot, which makes consumer drones sold at retailers like Best Buy Co Inc (NYSE:BBY), started off 2017 by laying off 290 employees from its drone division. In other words, the second place Karma drone will be the first choice as a DJI alternative for many people.
Do the math and GoPro’s opportunity is clear.
The company got into the drone business in the first place to escape the trap of being reliant on a single product — its Hero action cameras. With DJI facing challenges in the U.S. market, second place GoPro is in a position to leverage its Karma drone as the best choice for worried consumers, and possibly light commercial use. If it can capture even a small chunk of DJI’s sales, the impact on GPRO’s bottom line could be considerable — remember, personal drone sales alone for 2017 are expected to be double GoPro’s entire revenue for 2016.
DJI is working hard to address security concerns, but if GoPro is able to leverage the current situation to boost Karma drone sales, that second product line could become very profitable. And that could do wonders for GPRO stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.