GoPro Inc (NASDAQ:GPRO) surprised a lot of analysts, including me, posting positive earnings for its July quarter. The net loss of $30.5 million, 22 cents per share, was surprisingly low. The revenue, $296.5 million, was surprisingly high. The result was a pop in the GPRO stock price from $8.72 per share all the way to $10.76, over 20%.
But while the earnings turned around some InvestorPlace writers, the company’s longer-term prospects have since sent the stock back down to its Aug. 31 opening price of $9.11.
I admit to having been caught offside by the strong quarter. Going into earnings I called GoPro stock the “dark side of Moore’s Law,” suggesting that the company’s future lies in software, not hardware. I believed its drone market is lost to China.
I still think that. But I could be wrong about the future of GPRO stock.
GPRO Stock: Where Did We Go Right?
To get that quarter GoPro laid-off workers and cut back production, which squeezed the shorts and sent the shares up.
This was enough for InvestorPlace writers who use options to get back on board. Chris Tyler suggested a strategy of long calls for maximum profit. Tyler Craig suggested selling the $8.50 put, and GPRO stock hasn’t fallen that far yet.
Those with a longer-term view on GoPro stock were less impressed.
Vince Martin suggested investors take the news with a grain of salt, noting that gross margins are still falling, just not as fast as analysts expected, and inventory has shrunk, but the company still faces intense competition, and its guidance on the fourth quarter is nowhere near its salad days of 2015.
Brad Moon is also skeptical. Even if users upgrade to its new 4K Hero5 cameras, and the Karma drone can maintain its No. 2 position in the U.S. market, China’s DJI is in full control of the drone market and companies like Garmin Ltd. (NASDAQ:GRMN) will provide stiff competition in the camera market. A return to glory is unlikely.
Overall, analysts are still not overly impressed by GPRO stock. Most have come off their sell recommendations, but only one is saying buy and most have it as a hold, meaning they don’t know what to say about it.
What Can GoPro Do?
The better performance by founder and CEO Nick Woodman seems to call for an exit strategy, a sale of the company to a stronger competitor that might give it the investment and time it needs to make the Karma drone truly competitive.
Garmin would be the most likely acquirer. It has a market cap of $10.25 billion, against GoPro’s $1.32 billion, and the Swiss company has a broad product line GoPro could fit into. A merger with its chip supplier, Ambarella Inc (NASDAQ:AMBA), would be a merger of equals, and Ambarella would wind up competing with its own customers.
The company could seek a buyer among the military drone makers, the Karma being a cheap spy device. That would mean companies like Northrup Grumman Corporation (NYSE:NOC), Textron Inc. (NYSE:TXT) or Boeing Co (NYSE:BA). Or it could look to industrial equipment companies such as Honeywell International Inc. (NYSE:HON) and General Electric Company (NYSE:GE), which could sell the drones for overseeing plants, pipelines and in security applications.
All, however, are longshots. I have no information indicating GPRO is even considering a sale, let alone that it has drawn up a list of potential acquirers.
Bottom Line on GoPro Stock
The company has run through its consumer hobbyist market. It needs to either find new directions for product development or seek a sale to give GPRO stock owners a fat profit.
Unless I were playing options, I would avoid GoPro stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
