Things Keep Getting Worse for GoPro Inc Stock

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GPRO - Things Keep Getting Worse for GoPro Inc Stock

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Once-loved action camera maker GoPro Inc (NASDAQ:GPRO) reported holiday numbers last Thursday (Feb. 1) after the bell. The company widely missed even depressed expectations, and GPRO stock sank in after-hours trading.

The stock opened up on Friday lower but proceeded to bounce higher and turn into positive territory despite the rest of the market having one of its worst days in recent memory.

Is that a sign that a bottom is in on GPRO stock?

Maybe. But probably not.

GoPro’s holiday numbers were just that bad. And GPRO stock still isn’t that cheap considering the company’s lack of profitability. At best, I think this stock is fairly valued, and that includes potential upside from an acquisition.

Bad Quarter Shrouds Profitability Outlook

The quarter wasn’t all bad for GoPro. But it was mostly bad.

The company is trying to talk up its content and social business, touting huge follower and viewership growth numbers in 2017 across multiple social media platforms. But big growth in followers doesn’t translate into profits for GPRO.

Meanwhile, management is also trying to talk up its “Plus” subscription service. But that service only has 130,000 subscribers. At $5 a month, that is only $7.8 million in annual revenue. GPRO stock’s market cap is roughly $800 million, so a $7.8-million revenue opportunity doesn’t exactly move the needle.

Put the subscription and content stuff to the side, and the truth behind GPRO’s business rears its ugly head: the company is struggling to sell cameras at high enough price points to drive sustainable profitability.

GPRO cut prices across its product portfolio in early December due to lack of demand. The price reductions did cause a lift in sell-through rates, but the financial results look ugly. Fourth quarter revenues dropped nearly 40%. Gross margins fell from 40% to 25%. Last holiday quarter’s operating profit turned into an operating loss. Nothing was pretty about the quarter.

Management is correct in saying that the price reduction does show that there is healthy demand for GPRO products at the right price. But that “right” price is too low. If gross margins keep tracking at the mid-20s like they are supposed to in the first half of 2018, GPRO will never be profitable.

Granted, management believes it can shift consumers toward higher-margin products in the back half of 2018 and get gross margins back up to the upper-30s range, but that seems like a stretch. If consumers weren’t willing to pay more for cameras last year, why would they be willing to do it this year?

Consequently, I think the best-case scenario for GPRO stock is my previous projection for 5% revenue growth over the next five years and 5% operating margins. Under that modeling, I think GPRO stock is worth $4.50. See the math here.

There is an opportunity for GPRO to get acquired at around $9 per share, but dismal fourth quarter numbers and a shrouded profitability outlook have lessened the likelihood of an acquisition.

I now peg the likelihood of an acquisition at 25% (versus 40% prior). I keep my likelihood at 25% because the company’s most likely suitor, Apple Inc. (NASDAQ:AAPL), plans to weaponize a ton of cash in the near future.

From this standpoint, there is a 75% chance GPRO tracks toward $4.50 and a 25% it tracks towards $9. That combination yields a fair value of roughly $5.60.

Bottom Line on GPRO Stock

At best, I think the stock is fairly valued right now.

Buying the dip here feels like catching a falling knife that doesn’t have much fundamentally supported upside. Unless you think GPRO will get acquired soon, I think this stock is in sell territory.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/things-keep-getting-worse-for-gopro-stock/.

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