The short-lived rally in GoPro Inc (NASDAQ:GPRO) clearly has come to an end. GPRO stock almost touched $12 back in late September, amid optimism toward the holiday season; it’s since lost almost half of its value.
Indeed, sentiment clearly turned before the holiday season. Then, ugly preliminary fourth-quarter numbers showed that GoPro’s key problem hadn’t been fixed. Simply put, demand for GoPro products is not strong enough, or deep enough, for the company to sell them at full price. GoPro stock touched an all-time low of $5.04 — after setting a previous all-time low last year — before bouncing.
That bounce, too, looks like it might be short-lived. GPRO stock closed down about 3% on Tuesday after Morgan Stanley (NYSE:MS) downgraded the stock. A $5 price target predicts yet another leg down for the stock.
From here, Morgan Stanley looks right, if late, given its previous target had been $9.50. GoPro’s only out is to sell itself. But after back-to-back dismal holiday seasons, demand for the company may be as weak and as narrow as the demand for its products.
Market Giving GPRO ‘Too Much Credit’
The Morgan Stanley note, at least based on the parts released publicly, highlights many of the same concerns I’ve laid out in the past regarding GPRO stock. The value of GoPro stock is tied to the value of the “usability” of the GoPro camera — and that is a big problem.
There simply aren’t that many potential consumers for GoPro products. The HERO6, for instance, undoubtedly is cool. But for 90% of people, an Apple Inc. (NASDAQ:AAPL) iPhone is more than good enough to capture video. Few of us are hurtling down a mountain on a bike or skiing in the backcountry.
And even with cool products, MS analyst Yuuji Anderson makes an interesting argument: the software simply isn’t good enough. But with GoPro slashing costs, it doesn’t have the same budget, or the same personnel, to make improvements.
On its own, the point is clear: GoPro simply isn’t quite valuable enough. And in terms of an acquisition, Anderson writes that the market is giving “too much credit” in terms of GoPro’s value. That makes some sense. If GoPro can’t sell at full price on its own, why exactly would new ownership be any different?
It’s not as if Best Buy Co Inc (NYSE:BBY) and Amazon.com, Inc. (NASDAQ:AMZN) aren’t promoting the product enough. The product simply doesn’t sell at the price levels GoPro desires.
The preliminary Q4 numbers showed a whopping miss of nearly $100 million relative to operating income expectations. That’s an insanely huge number for a company worth roughly $850 million. Pretty much all of that miss came from pricing, and Anderson appears to understand that GoPro is going to have a hard, if not impossible, time fixing that problem.
How Does GPRO Stock Rebound?
Rumors of a potential sale are swirling, which helped GPRO recover after the post-earnings fall. Anderson seems to dismiss that possibility, but a sale does seem likely at some point.
On this site, Anthony Mirhaydari speculated that Apple might be interested in GoPro. Apple will have a flood of cash coming in over the next few quarters, and an acquisition is likely.
I’m skeptical that it will be GoPro or Fitbit Inc (NYSE:FIT), another struggling single-product company floated by Mirhaydari. Canon Inc (ADR) (NYSE:CAJ) also is in the market for acquisitions and could see the HERO6 as complementary.
The problem is twofold. First, CEO Nicholas Woodman controls the company, and he may not be willing to sell with the stock 90%+ off its all-time highs. Secondly, a sale doesn’t guarantee a price above $6, or even $5. The company still isn’t profitable, though it may be able to get there on a non-GAAP basis in 2018 given a projected $80 million in cost cuts.
But those cost cuts simply limit the amount of savings an acquirer could see; the underlying business still is the problem. That’s been clear in the results for some time now, and particularly in the preliminary Q4 results. With the drone business being shut down, and Wall Street now catching on, there’s little reason to see a bottom in GPRO stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
