GoPro Inc (NASDAQ:GPRO) is doing some un-GoPro like things lately; namely, it’s making recent investors plenty of money, and while others on the sideline are considering a speculative shot. This is far different from the company’s prospects in 2016, when GPRO stock ultimately ended up losing 50% of its market value. Still, potential buyers are right to be hesitant.
A few days ago, GPRO stock gapped up significantly on the basis of a stronger-than-expected guidance update for the third quarter. The long-embattled camera and drone maker now expects earnings and revenues to come in near the upper range of estimates.
This news couldn’t come any sooner. Although GoPro previously laid out strong earnings beats, Wall Street questioned its ability to grow in an ultra-competitive sector.
I say it’s a fair question. From a personal perspective, GPRO stock has been one of my favorite bearish targets. Despite its ability to surprise you to the upside, I believed its poor fundamentals would eventually win out. Case in point is my most recent GoPro article, published on Nov. 2 when shares closed at $12.84. A month prior, GPRO was above $17.
When I wrote that piece, the technical read for GoPro stock also looked rather poor. But if you’re absolutely against giving the technical approach any credibility, then don’t. Just focus on the industry fundamentals. Whatever GPRO does could easily be duplicated by competitors Sony Corp (ADR) (NYSE:SNE) and Panasonic Corporation (ADR) (OTCMKTS:PCRFY).
Even if the action-camera maker has the brand advantage, they’re still in a commoditized market. At any one moment, a competitor could come up with something better or cheaper, or both. The markets don’t like ambiguity; hence, the awful long-term performance of GoPro stock.
GPRO Stock Can’t Maintain Momentum
Despite this broader ugliness, an increasing number of analysts are feeling the love for GPRO. Since the opening trade of this month, GoPro stock is up nearly 19%. Almost all of the enthusiasm was centered on the company’s Q3 guidance update, and its robust Q2 earnings report. On paper, GoPro produced an earnings surprise of 64% in Q2, which happens to be the action-camera maker’s largest-magnitude earnings surprise so far.
Naturally, GoPro CEO Nick Woodman played up the great news as confirmation that his company will legitimately turn around. Citing a combination of cost-cutting initiatives and more importantly, “strong demand,” it’s tempting to think that GPRO stock finally arrived. However, I remain skeptical.
Since delivering its Q2 report on Aug. 3 and prior to the revised guidance, GoPro stock only enjoyed three days of forward momentum. Of course, with the bullish Q3 guidance, GPRO received a reactionary upside swing. But I still don’t think it’s enough to sway most bears.
If we take Woodman’s words at face value, I think the reaction should be more convincing. As InvestorPlace contributor Brad Moon notes, revenue “is up 34% year-over-year and 36% compared to the previous quarter. The numbers show that GoPro is actually moving more product.”
Moon further writes that “job cuts and fat trimming definitely didn’t hurt the situation.” I, however, think it did hurt the company’s future prospects. By cutting other businesses and focusing mostly on its core products, GoPro stock is even more of a commoditized investment. It will live or die with its Hero action cameras.
The volatility shortly after Q2 demonstrates Wall Street’s uneasiness with that stark, all-in-or-nothing approach.
GoPro’s Eggs Are In One Basket
I previously worked in Sony’s digital camera division, and the competitive environment was a nightmare. Not only did we have to compete with other camera manufacturers, technology’s rapid pace made any advantage accrued short lived.
Sony and companies like Garmin Ltd. (NASDAQ:GRMN) and Apple Inc. (NASDAQ:AAPL) have the luxury of multiple businesses. If one sector comes up short, others potentially could fill the gap. GPRO stock lacks that margin of error — a major dilemma for would-be investors considering its past fumbles.
GoPro is also going up against established imaging companies in a substantially weakened state. Gurufocus.com, according to their proprietary methodology, has issued five warning signs against the consumer tech firm. Anecdotally, that’s one of the worst records I’ve seen. What’s not anecdotal are the facts: GPRO badly underperforms its industry in several key financial metrics.
Looking at all the factors and borrowing from my own professional experience in consumer tech, I see red flags everywhere. GPRO stock will probably shoot higher for short periods of time. But you won’t see me chase this company. At a certain point, you can’t run from the fundamental reality.
Josh Enomoto is long SNE.
