GoPro Inc (NASDAQ:GPRO) announced its Q2 earnings and the financials for the action camera (and drone) maker are looking a little less dire. In response to the news on Friday, GPRO stock shot up by as much as 17% at one point in post-earnings extended trading.
Revenue was up 34% year-over-year and while still operating in the red, GPRO trimmed losses to about $30 million. Was the improvement all due to fat trimming and layoffs, or is the company actually gaining the kind of momentum that could lead to a GPRO stock recovery?
While GoPro reported a $30-plus million loss, compared to roughly three times that amount in Q2 2016, the company says it is on track to return to profitability in 2017.
Blip or Actual Improvement?
The question is, after a year in which GPRO stock has lost half of its value — and is down 90% from 2014 levels — is last quarter’s improvement a blip and the result of actions like layoffs? Or, does it reflect an actual improvement in GoPro’s business, indicating the possibility of an actual turnaround?
According to CEO Nick Woodman , it’s the latter, with a bit of the cutbacks thrown in.
“Strong demand combined with our cost management and margin initiatives contributed to GoPro’s EBITDA positive performance in the second quarter,” Woodman said in company announcement.
One of the key indicators is revenue, which is up 34% year-over-year and 36% compared to the previous quarter. The numbers show that GoPro is actually moving more product. During the holiday season, GPRO suffered the double whammy of a recall of its new Karma drone and manufacturing issues with its new Hero5 action camera. As a result, it had no drones on store shelves and camera sales were hit by a shortage of its flagship model.
What wasn’t clear was whether the forecast demand for these products was actually there.
The company’s Q1 earnings suggested it was indeed the product shortage that hurt the company’s holiday sales, as opposed to lack of demand, with revenue up 19% compared to Q1 2016. With Q2 earnings up even more, GPRO is making a strong case for a comeback.
Of course, those job cuts and fat trimming definitely didn’t hurt the situation. The company has been firing people for more than a year, including 270 layoffs in March. It also shut down its entertainment division to focus on core businesses.
Will Product Demand Boost GPRO Stock?
GoPro’s Q2 earnings report cites statistics from NDP Group’s Retail Tracking Services that peg the Karma drone as the number two drone by sales in the U.S. in the second quarter. The Hero5 is listed as the best-selling digital image camera in the country for the period. The company is also pinning hopes on its forthcoming Fusion pro/VR camera.
But how healthy are these markets?
Drones remain largely a hobby — especially those in the $1,000 range like GoPro’s Karma drone. New rules and regulations are restricting areas where they can be used, which could hurt demand. But the market remains far from saturated. Gartner predicts that personal drones costing less than $5,000 will rack up sales to the tune of $2.36 billion in 2017, compared to $1.71 billion in 2016. The research company sees the overall drone market increasing to $11.2 billion by 2020.
China’s DJI remains firmly in control of the consumer drone market, capturing 50% of North American drone sales, including 66% of drones priced between $1,000 and $2,000.If GPRO’s Karma drone — which was sidelined for 2016 — could win a chunk of that $2.36 billion this year, it would go a long way. And based on its sales ranking, the Karma is getting the job done, despite the stumble at launch.
Bottomline on GRPO Stock
GoPro says its Hero5 is the best-selling digital image camera in the U.S., putting it ahead of action-camera competitors like Garmin Ltd. (NASDAQ:GRMN) as well as traditional digital camera makers (who have been slammed by smartphone cameras).
There’s been concern that a new generation of waterproof smartphones with 4K video — like Apple Inc.’s (NASDAQ:AAPL) iPhone 7 — would also eat into action-camera sales, but that hasn’t been happening. Consumers either don’t want to risk their expensive smartphones, or the benefits of action cameras like the Hero5 remain sufficient to buy a specialized device.
The global action camera market is predicted to hit $5.8 billion by 2021, growing at 15% a year. Although the market has appeared to be near saturation, owners of older HD models are expected to be upgrading to 4K cameras — like the Hero5 — helping to drive growth.
With the predicted growth of the action camera and drone markets, slimmed down operations, popular options like the Karma drone and Hero5, and new products in the pipeline, GoPro is well positioned to meet its 2017 profitability goal.
Don’t expect GPRO stock to return to 2014 levels any time soon, but its 2017 slide may well be over.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.