GoPro Stock Craters, But What Did You Expect?

GoPro stock - GoPro Stock Craters, But What Did You Expect?

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GoPro Inc (NASDAQ:GPRO) stock has plunged in early trading. GoPro stock touched an all-time low of $5.04 before rebounding near $6 as of this writing. The decline is coming after bad news, both financially and operationally.

Over the weekend, reports surfaced that GoPro had laid off 200-300 employees, mostly from its drone division. Then, on Monday morning, GoPro released preliminary results for the fourth quarter. Those results badly missed the company’s original guidance given with the third-quarter release — and that guidance already had disappointed, leading to a double-digit decline after that report.

Monday’s fall is not a buying opportunity for GPRO — not by a long shot. I argued just two weeks ago that GPRO, above $7, wasn’t cheap enough. That’s still true below $6.

In the action camera business, GoPro clearly has no ability to maintain pricing power. Meanwhile, the company is exiting the drone business, leaving it without any incremental market opportunities.

There is the hope of a sale, but shareholders are purely reliant on CEO Nicholas Woodman, who may not want to sell. And even with GPRO at an all-time low, it’s far from guaranteed anyone will pay up. This is an ugly story, and it’s getting uglier.

Preliminary Q4 Results

Again, it’s not as if the original fourth-quarter guidance was all that impressive. Yet the updated figures are much, much worse:

  1. Revenue: $340 million against guidance for $460-$480 million;
  2. Non-GAAP gross margin: 25%-27% against guidance of 41%-42%;
  3. Non-GAAP operating income (implied): $32 million loss against guidance for $65 million profit.

Read that last sentence again. Operating profit will be nearly $100 million lower than guided. And pretty much all of the impact is coming from one simple fact: GoPro had to slash prices. It had to cut HERO5 Black pricing, because “consumers were reluctant to purchase HERO5 Black at the same price it launched at one year earlier,” per Woodman in the release. HERO6 Black pricing followed, with the price falling to $399 from $499.

As a result, GoPro had to reimburse retailers under its “price protection” agreements, which cost the company some $80 million in the quarter. But this isn’t just a one-time problem. GoPro has struggled with pricing in the past. And the HERO5 Black cuts show a key problem: consumers expect prices for existing models to come down over time, which means they incrementally become less profitable. Meanwhile, those cuts, in turn, force lower prices on newer products.

Again, this isn’t a new problem, or an issue limited to just the 2017 holiday season. GoPro simply doesn’t have much in the way of pricing power. Without it, it’s hard to see how the currently unprofitable company ever becomes profitable.

Drones Are Done

The other piece of bad news is that GoPro is exiting the drone business. The company cited “margin challenges” and “a hostile regulatory environment in Europe and the United States” as reasons for the move.

But there are self-inflicted wounds here as well. The Karma drone had to be recalled in November 2016. With GoPro both late to market and executing poorly, Chinese manufacturer DJI has gobbled up dominant market share.

The question, then, is what, exactly, can GoPro offer besides action cameras? It’s already shut down its entertainment division. Now the drone business is coming to an end.

And it’s not clear GoPro even can win in action cameras beyond the narrow HERO lineup. The Fusion VR offering is competing with everyone from Garmin Ltd. (NASDAQ:GRMN) to Facebook Inc (NASDAQ:FB) to the 360Fly unit at small-cap VOXX International Corp (NASDAQ:VOXX).

So far, it doesn’t appear to have moved the needle much in terms of sales. This is a business now reliant on an exceedingly narrow niche where it can’t control pricing and can’t execute all that well. How, exactly, is that supposed to work?

GoPro Stock Is Not Cheap Enough

The final concern with the updated Q4 numbers is that GoPro now is going to be unprofitable for 2017, with little hope for improvement going forward. The company officially announced the rumor job cuts in the Monday morning release and plans to target operating expense below $400 million in 2018 — a roughly $80 million reduction.

That’s right about where non-GAAP operating loss should come in this year, which means GoPro could be breakeven next year. But that in turn assumes that the business holds up both from a revenue and pricing standpoint.

And there’s simply no reason to believe that will be the case. Even if it is, breakeven doesn’t support a valuation that still sits at $740 million, even backing out the company’s net cash. A buyer is possible in theory, but the problems with GoPro seem just as endemic to the product as to the company, and expecting much of a premium is optimistic near the point of delusion.

The single-product hardware space is a tough one, as Fitbit Inc (NYSE:FIT) has shown. GoPro has significant execution problems, as its history as shown. And it’s unprofitable, as its numbers show. Just because a share price below $6 seems cheap doesn’t mean GoPro stock is cheap. It’s not. And it’s likely there’s still more downside to come.

As of this writing, Vince Martin has no positions in any securities mentioned.

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