GoPro (NASDAQ:GPRO) stock has managed to staunch the bleeding for the time being. GPRO has recovered from its recent low at $4.00, rebounding to $5 this week. That’s a nice 25% move off the low. However, it’s still a far cry from the $7.60 52-week high price, let alone the $30 level where it started trading at following its IPO. Simply put, GoPro stock has been a massive bust.

That’s not likely to change anytime soon. GoPro shocked investors with a dismal quarterly report in November. GPRO stock slumped 24% on Nov. 2 following that earnings report.

While the company beat on revenue guidance, its all important margins continue to slump.

GoPro’s Business Model Problem

It’s long been an open secret in the tech world that software builds empires, whereas hardware loses traction over time. Software generates huge profit margins, and tends to garner recurring revenue for many years to come. Hardware companies, on the other hand, rarely stay popular for more than a couple years.

Apple (NASDAQ:AAPL) is the arguable exception in recent times, but even they have powerful lock-in with iOS, whereas the other cell phone makers largely flamed out as investments.

Regardless, in general, companies that have to rely on hardware sales often struggle. The reason shouldn’t be hard to understand. A software company has far more customer retention, as users become accustomed to a particular product.

They entrust their data to it. It is difficult to switch to a competitor. And there are often numerous patents to protect the software as well. With hardware, it’s very easy for low cost international competitors to make a similar product at a cheaper price. Unless your brand is rock solid, many of your customers will defect to a cheaper hardware product with similar functionality.

We saw this play out yet again in GoPro’s latest quarter. Despite the launch of the HERO7 camera, which performed well enough and led to a revenue beat, the company got hammered on margins.

Amazingly enough, while revenues plummeted $44 million for the latest quarter versus the same period in 2017, product creation costs fell by just $5 million. That left gross profit down by almost $40 million versus the same quarter last year. That’s horrific.

Services and GoPro Stock

GoPro’s business strategy apparently has been to try to build out the platform to sell more services. Wall Street loves subscription revenue, so perhaps there is merit in the idea. To GoPro’s credit, they still have $148 million left in cash, and the business is running near breakeven, so there is time to execute a pivot in their business model.

However, the company’s GoPro Plus subscription model seems to be off to a slow start. GoPro Plus offers users easier video making abilities, cloud storage of videos and pictures, a discount on GoPro accessories, and replacement cameras should a subscriber break theirs. At $4.99 per month, this seems like a fairly generous benefits package at the price point.

Regardless, so far, GoPro has only signed up 185,000 paying subscribers, a figure that was up an okay but not impressive 16% sequentially this past quarter. At the current run rate, that is $11 million a year of revenues, and quite a bit less in profits once accounting for the costs of cloud storage, app maintenance, replacement cameras, and so on.

At this point, GoPro Plus doesn’t look like it can save the GoPro stock price.

GoPro Stock: This Is a Melting Ice Cube

At this point, the only realistic path to substantial gains for GPRO would be a buyout. It’s long been rumored that someone will want to buy GoPro out to get access to the brand. In theory, that makes a lot of sense, as an owner like Apple could do a lot with the brand. A Chinese hardware giant, such as Xiaomi might want to buy GoPro for quick inroads into the U.S. market as well.

That said, even GoPro’s last lifeboat, a buyout, is looking more and more tenuous. The longer GoPro continues to flail about as a public company, the less value it will have to an acquirer.

Action cameras have really fallen off in trendiness over the past couple years. Additionally, GoPro itself is shrinking dramatically to make it up for its deteriorating business prospects.

Over the past two years, GoPro has slashed its workforce from 1,722 employees to just 927 as of the most recent quarter. On top of that, it has cut its advertising spend. Its dramatically discounted cameras are also hurting the brand’s standing with higher-end consumers.

All in all, it looks like GoPro will continue to trend steadily into penny stock land in coming quarters. I will note that 27% of the float, a massive amount, is short GPRO. That indicates supreme confidence by the market that GoPro stock will continue to be a loser.

It does, however, offer the potential for a sharp short squeeze should GoPro manage to beat earnings in its all-important holiday quarter. That said, I’d stay far away from GPRO stock. If you do own some, this rally looks like a great opportunity to get out while the price is back up around $5.

At the time of this writing, Ian Bezek held no positions in the aforementioned securities. You can reach him on Twitter at @irbezek.