GoPro Inc (NASDAQ:GPRO) wasted an opportunity. The company announced a standout quarter yesterday. However, CEO Nicholas Woodman set expectations too high going into the release. GoPro telegraphed that Q3 was going to be big, thus causing GPRO stock to run up into earnings.
Now, GoPro stock is selling off nearly 12% in mid-day trading.
The ever-influential Jim Cramer joined the turnaround sentiment last week, saying: “Here’s the bottom line: in this market, even the doggiest dogs can have their day. I think GoPro has really turned things around here. I wouldn’t be averse to putting on a small position before the quarter.”
That sort of enthusiasm caused GPRO stock to run up from $9 to $10.70 ahead of earnings. Unfortunately, while the company delivered superb Q3 results, the market had anticipated that Q4 would be solid as well. Instead, we got a big miss on guidance.
Will this dog of a stock have another chance, or is it GoPro stock dead money heading into the holidays?
GPRO Stock Cons
Weak Guidance: For the fourth quarter, GoPro expects 42 cents-per-share of profits, against prior expectations of 57 cents. On revenue, the company anticipates $470 million. That’s miles short of analysts’ expectations for $521 million.
Bulls can try to spin this as GPRO putting less inventory into retail channels. In the past, it has loaded up retailers with products, leading to strong holiday sales, but weak results over the rest of the year. A more modest inventory build-up now would lead to more consistent results. That said, it’s hard to justify the entire $50 million drop in revenue guidance just based on inventory management. The likely read is that Hero6 demand is off to a slow start. And that’s not good news for GPRO stock by any means.
Hero6 Issues: The Hero6 is having some significant launch issues. If you look at Amazon.com, Inc. (NASDAQ:AMZN) user reviews, virtually all editions of the Hero have garnered 4 or 4.5 stars.
Until the Hero6 that is. The new camera has an overall 3.4 star rating, as of this writing, and an alarming number of 1-star reviews. There are numerous user complaints about the camera freezing, firmware not working well, and the battery draining inexplicably quickly, among other things. If GoPro doesn’t get the Hero6 back on track quickly, it will be hard to justify its premium pricing versus either the Hero5 or competitors’ products. Even some positive professional reviews are saying that the 5 is adequate for many users given the 6’s premium pricing.
Q3 Results Were Against Weak Comps: GPRO showed huge improvement this quarter from Q3 of 2016 to Q3 of this year. Revenue spiked 37%, and the company’s net income swung from a $104 million loss to a $15 million profit this quarter.
Seems great, right?
However, it’s worth remembering that Q3 2016 was a particularly soft quarter for GPRO stock. The Hero4 was two years old at that point. And the Hero5 didn’t launch until October 2016, so sales were limited as there was no time for sell-through on the initial retailer inventory orders. For Q3 this year, GoPro’s Hero5 was less than one year old, and the Hero6 also launched at the tail end of the quarter, giving it more impact inside of this quarter as well. Don’t be fooled by sparkling top-line numbers, the revenue and profit growth rates that GoPro showed this quarter won’t sustain themselves once the company is up against stronger comp numbers.
GPRO Stock Pros
Strong Q3 Results: GoPro blew out its third-quarter estimates. Analysts forecast just 2 cents-per-share for earnings. GoPro put up 15-cents-per-share instead. The company’s $330 million in revenues also topped expectations by a large margin.
Besides beating expectations, this quarter did something else important for GPRO stock. It returned the company to profitability in a non-holiday quarter. It has been rather surprising that GoPro wasn’t able to generate consistent profits despite dominating its niche. While GPRO stock won’t necessarily fly simply due to it regaining profitability, it was a necessary prerequisite for the stock to have a realistic shot of trading consistently above $10 again.
Fantastic Brand: GoPro is a great brand. The company has a dominant position on social media. It clocks in with more than 13 million followers on Instagram, 10 million on Facebook Inc (NASDAQ:FB), and 5 million plus on Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Youtube.
When many people think and talk about action video cameras, they simply call them GoPros, even if they are referring to a competitors’ product. That is the sort of ironclad brand that leads to long-term profits. GPRO hasn’t consistently been able to leverage that into shareholder results since the IPO.
Takeover Target: That leads us to the next point. GPRO is potentially a gold mine. For whatever reason, GoPro has largely wasted this opportunity under the current management team.
However, sooner or later, someone will try to capitalize on GoPro’s strong brand if the company can’t do it on its own. Apple Inc. (NASDAQ:AAPL) would be one natural acquirer. Apple has done well over the years combining hardware with software. For example, both iTunes and the iPod were worth much more as a combined unit than each would have been separately. GoPro doesn’t have much going in the way of software. That would give Apple an easy place to add value in a merger.
There are plenty of other potential acquirers, such as other large consumer electronics firms. Online brands looking to bolster their image and pick up another marketing/content channel with millennials could also be step in. Or perhaps a private equity buyer will step in. And given Fitbit Inc’s (NYSE:FIT) struggles as a public company, GoPro could pursue a merger of equals. That would allow both companies to shed the one-trick pony image.
GoPro’s fourth quarter guidance was a real shocker. It’s no surprise that investors have dumped GPRO stock in the aftermath; however, there could be real value here under $10.
The Hero5 returned GoPro to profitability, and assuming the company can get initial launch glitches taken care of, the Hero6 shows great promise, which could build on the momentum. At just a $1.5 billion market cap, many acquirers could make a bid to take GoPro over. Ultimately, the brand is valuable, and that should put a floor under the GPRO stock price here soon.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.