GoPro Inc (GPRO) Stock Takes an Action-Packed Leap With Q2 Beat

GoPro's second-quarter earnings report is a no-doubt winner, but long-term concerns about GPRO stock still must be addressed

GoPro Inc (NASDAQ:GPRO) reported its fiscal second-quarter earnings Thursday night, and GPRO stock responded by jumping 10% in early after-hours trading. But investors who simply looked at the headline numbers might be surprised the gain was only that much, and that GoPro stock still traded below $10.

GoPro Inc (GPRO) Stock Takes an Action-Packed Leap With Q2 Beat
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GoPro’s report is that good on its face.

The action-camera maker posted a massive beat relative to both analyst estimates and its own guidance. Heavy cost-cutting significantly helped margins — without hurting sales. Q3 guidance looks solid. GoPro is heading back toward profitability. And it still has the Fusion 360-degree camera launch later this year.

Undoubtedly, GoPro earnings were strong. But investors would be wise to take the results with at least a grain of salt.

GoPro’s seemingly huge growth is coming in large part simply because 2016 results were utterly disastrous. There’s a reason GPRO stock still sits so far (almost 90%, even including the after-hours gains) off its all-time high.

And the problems facing GoPro won’t be cured in a quarter or two.

GoPro Q2 Earnings at a Glance

GoPro’s second-quarter numbers were outstanding. Revenue of $296.5 million was up a sizzling 34% year-over-year, handily beating expectations for a 22% increase. Adjusted net loss narrowed sharply, to 9 cents per share from 52 cents the year before. Analysts had expected GoPro to lose 25 cents per share on a non-GAAP basis.

Looking deeper, there’s room for more optimism. Gross margin of 36.2% did fall 620 bps year-over-year. But it was nicely ahead of guidance for 32.5%-34.5%. And GoPro managed to cut its inventory a whopping 39% year-over-year.

In other words, GPRO needed to move product ahead of launches later this year. The fact that it did so without resorting to massive discounting seems to imply that demand has stabilized.

Non-GAAP operating expenses, meanwhile, simply plummeted. Somewhat incredibly, GoPro cut costs by 36% relative to Q2 2016. The company had been consistently more aggressive on that front, moving full-year 2017 opex guidance from $650 million after Q3 to “under $600 million” after Q4 and then “below $495 million” after Q1. There was an obvious concern that those cuts might have been going too far. But the fact that performance — and demand, as least based and pricing — improved in Q2 assuages those fears.

And it does seem like demand was reasonably widespread. After qualifying the Karma drone performance in Q1 — “the #2 best-selling drone priced over $1,000 in the U.S. on a unit basis” — Karma was simply the No. 2 brand in the country in Q2, according to research cited in the GoPro earnings release. Hero5 Black retained its market dominance. And GoPro showed real strength overseas, with sell-through growing 7% in EMEA and a whopping 194% in Japan.

At least from Q2’s fundamentals, it’s hard to see anything but good news for GoPro.

GPRO Stock Looking Forward

It doesn’t appear as if the second quarter benefited from shipment timing or any other one-time factors. Q3 guidance looks equally strong, and similarly well above Street estimates. Revenue is guided up roughly 25% year-over-year. Gross margin is expected to improve sequentially, with the decline from last year moderating. After losing $73 million on the EBITDA line last year, GoPro guidance implies a $5 million-$10 million profit this year — a quick and rapid reversal.

Despite all the good news, that Q3 guidance still shows just how far GoPro needs to go simply to get GPRO stock consistently back in double digits.

As good as 2017 numbers look, they unquestionably are helped by just how terrible 2016 was. Indeed, comparing to 2015 figures shows how far GoPro has fallen, even with a strong 2017 so far:

  • Revenue guided to $300 million against $400 million in Q3 2015
  • Gross margin of 36%-38%, down ~1,000 bps in two years
  • Non-GAAP operating expenses of $116 million-$118 million, down 17%
  • Adjusted EBITDA of ~$5 million-10 million against $56 million two years ago.

Those opex cuts can’t happen every year. Gross margins still need to rebound quite a bit, which requires full-price selling of the Fusion, in particular. The Karma might be No. 2, but it’s still a distant No. 2 to China’s DJI. And competition is coming from Garmin Ltd. (NASDAQ:GRMN) in 360-degree cameras and multiple startups in the drone space.

Q2 was a great quarter. But the concerns surrounding GoPro stock haven’t just disappeared as a result. Some of the key drivers here may not be sustainable, notably the cost-cutting.

If that’s the case, GPRO may well stay stuck in the single digits for a long time.

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

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