Is GoPro Inc (GPRO) Stock a Risk Worth Taking?

GoPro needs to do more if its shares hope to climb into the teens

By Will Ashworth, InvestorPlace Contributor

GoPro Inc (NASDAQ:GPRO) founder, CEO and majority shareholder Nick Woodman cut up the camera company’s credit cards in the second quarter. Not literally mind you, but GoPro’s losses were much smaller in Q2 2017, suggesting its cost cutting measures appear to be getting it closer to profitability, a key ingredient in GPRO stock returning to the teens.

Is GoPro Inc (GPRO) Stock a Risk Worth Taking?
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When did GoPro last make money on a quarterly basis? Anyone?

GAAP or non-GAAP, GoPro last made an operating profit in Q3 2015, seven quarters ago. On a non-GAAP basis, it delivered an operating profit of $47.5 million on $400.3 million in revenue. Its non-GAAP gross margin that quarter was 46.8%, 230 basis points higher than the same quarter a year earlier.

Earnings = GPRO Stock Growth

Its operating ratio didn’t do nearly as well, increasing 30 basis points in Q3 2015 to 34.9%. The difference between its non-GAAP gross margin and its operating ratio gives us GoPro’s non-GAAP operating margin of 11.9% for the quarter.

Fast forward to Q2 2017.

Its non-GAAP gross margin was 36.2%, 620 basis points less than in Q2 2016 and its operating ratio was 39.3%, less than half last year’s obscenely high 82.8%.

So, its non-GAAP operating margin in Q2 2017 was -3.1%, considerably better than last year’s non-GAAP operating margin of -40.4%.

Now, I don’t know how you view this comparison, but I see a company that has severely cut its operating expenses over the past year in all three line items: R&D lower by 40.3%, sales and marketing by 33.2% and general and administrative by 24.6%.

Combined, GoPro cut its non-GAAP operating expenses by 36.3%. That’s some serious cutting.

Is It Enough for GoPro?

In 2014 — GoPro’s most profitable year in its history — the company had gross and operating margins of 45% and 13.4% on a GAAP basis. Not surprisingly, GPRO stock hit an all-time high of $94.31 in October 2014. The company finished 2014 with a price-to-sales ratio of 8, seven times what it is today.

On a non-GAAP basis, its operating ratio that year was 26.5%; it spent $369.4 million on operating expenses to generate $1.4 billion in revenue.

So, Q2 2017 delivered gross margins 880 basis points less than in fiscal 2014, an operating ratio 12.8 percentage points higher than in 2014 and an operating margin 16.5 percentage points lower than in 2014.

By every criterion, GoPro isn’t anywhere near getting back to its heyday.

Is GoPro Stock Worth Owning?

I tend to like companies that consistently make money. GoPro isn’t that, so you won’t find me buying it.

However, the fact that the GPRO stock price is up 15.7% in the past month suggests investors are getting more bullish about its prospects.

My InvestorPlace colleague Brad Moon recently did an excellent job examining how realistic the company’s assertion is that it will return to profitability in 2017.

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,” wrote Moon, Aug. 7. “Don’t expect GPRO stock to return to 2014 levels any time soon, but its 2017 slide may well be over.”

I couldn’t have said it better myself. If you’re okay with above-average risk, it’s probably safe to assume that the GoPro stock price is close to a bottom with potential upside available to patient investors.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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