Shares of action camera maker GoPro (NYSE:GPRO) printed a fresh all-time low in early October of $3.25 after the company reported that its new products, the HERO8 Black and HERO Max, would launch later than expected because of production delays. Since, GoPro stock has rebounded some to the $4 level as both cameras have already started shipping, earlier than they were supposed to.
But, in the big picture, GPRO has gone from $100 in late 2014, to $4 today. That’s a big drop, and the unfortunate reality is that this secular decline may not be over.
At its core, GoPro is a niche action camera company with no moat, a small addressable market, a lack of demand drivers, stagnant revenues, and low margins. Ultimately, that combination means that this company will never produce big profits. In the lack of big profits, GPRO stock doesn’t deserve to fetch a price tag north of $5 today.
As such, GoPro stock looks doomed to stick around all-time lows for the foreseeable future.
GoPro Isn’t a Great Company
At one point, this company was the pioneer in a secular growth action camera market. They were going to turn everyone and their best friend into action camera users and all those people were going to create a wealth of action sports content, which would turn GoPro into a media giant. Revenues and profits were going to soar, and GoPro was going to turn into a $100 billion company.
That was back in 2014. Fast forward five years and none of that has happened. Now, GoPro is worth less than $1 billion.
What did happen? First, and foremost, the action camera market stopped growing. As it turns out, there’s not a lot of demand for capturing action sports content with a camera because, after all, not many of us do action sports with enough frequency to warrant buying a camera for those activities.
Further, smartphone cameras got better and better and smartphones got more durable, so for casual action sports fans, a smartphone did the job of capturing content just fine.
Thus, the action camera market became increasingly niche, focused on individuals who do action sports frequently and who don’t want to put their smartphones at risk. That’s not that many people, so GoPro hasn’t sold that many cameras. In order to stoke demand, GoPro has had to cut prices, and that has weighed on margins.
The result? GoPro has turned into a small revenue company with anemic margins and no profits. Will things turnaround? Unlikely. The fundamentals underlying the action camera market aren’t going to change anytime soon, so unless GoPro finds some way to more deeply monetize its already existing ecosystem of users, the action camera maker will likely remain a low growth, low margin company.
GoPro Stock Doesn’t Deserve a $5 Price Tag
Given GoPro’s reality as a low growth, low margin company, GoPro stock doesn’t deserve a price tag north of $5 today.
At best, revenues will grow somewhere in the low single-digit range over the next few years, supported by flattish unit growth and marginal average selling price growth.
Gross margins will move somewhat higher with stabilizing demand, but not much higher because the company doesn’t have much wiggle room in terms of price hikes.
Opex rates will continue to drop, because management will keep pulling costs out of the system. But, there is only so much cost-cutting management can do, and they’ve already done a lot, so operating leverage going forward will likely be minimal.
Big picture? GoPro projects as a low single-digit revenue grower with somewhat improving margins. My modeling suggests that this growth profile could produce $0.50 in earnings per share by fiscal 2025. Based on a market average 16-times forward earnings multiple and a 10% discount rate, that equates to a 2019 price target for GPRO stock of under $5.
To be sure, GPRO stock could surge north of $5 in the event that new cameras stoke new demand, and the company starts selling a lot new cameras. But, my channel checks suggest that this isn’t the case with this new iteration of cameras — see the still deteriorating search interest trends for GoPro both domestically and internationally.
In the absence of a game-changing catalyst, GPRO stock will likely remain around all time lows.
Bottom Line on GoPro Stock
Over the past five years, GPRO stock has tanked from $100 to $4. This secular decline may not be over just yet. The reality is that GoPro is a low growth, low margin company, and as a low growth, low margin company, GPRO stock doesn’t deserve to trade above $5 today.
The investment implication? Continue to steer away from GoPro stock, for now.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
