On paper, there’s an intriguing case for action camera manufacturer GoPro (NASDAQ:GPRO). At less than 14x the midpoint of 2019 earnings per share guidance, the GPRO stock price is reasonably cheap.
That guidance suggests revenue and particularly profits should grow nicely this year. And with news of another acquisition in the consumer hardware space, GoPro stock can benefit from a potential takeover.
But the long-running problem with GPRO stock is that there’s usually a bull case on paper. In practice, however, GoPro disappoints. The GPRO stock price still sits 95% below 2014 highs.
Simply put, this has been a “next year” story for years now. In that context, a guidance cut in early October feels like more of the same.
Yet investors are giving GoPro another chance. GoPro stock has bounced 37% from all-time lows reached last month. Those gains put pressure on the company’s third-quarter earnings call later this week. If GoPro can inspire confidence that it’s finally on the right track, GPRO stock can bounce. Anything less, however, and GPRO’s story might finally break for good.
Delayed or Lost?
GoPro stock reached all-time lows last month after the company lowered 2019 guidance for both revenue and adjusted EPS. The company blamed a “late-stage production delay” in its new HERO8 for the cut.
The GPRO stock price dropped 19% on the news, and kept falling in subsequent sessions. But, as noted, it’s bounced nicely since, thanks to better news. The HERO8 is shipping. So is the HERO MAX. That’s driven optimism that the impact of the delay will be relatively minor. GoPro still will get the same sales. But some of those sales will slip into 2020.
Job one for Thursday’s earnings report is to support that case. GoPro’s updated guidance projects second-half revenue growth of 6-9% year-over-year. That guidance absolutely must be maintained.
The lack of confidence in GoPro drove the significant reaction to the lowered outlook. Another reduction would undercut recent hopes that management was right — and destroy what little confidence there is in GoPro to begin with.
Fitbit and GPRO Stock
Part of the optimism toward GoPro stock in recent sessions likely has come from M&A hopes. Fitbit (NYSE:FIT) is being acquired by Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL). And there are numerous similarities between Fitbit and GoPro.
Both companies are consumer hardware plays, a space that has struggled (see also IP camera manufacturer Arlo Technologies (NYSE:ARLO)). Both stocks collapsed from highs reached after their respective initial public offerings. Each company has a long history of overpromising and underdelivering.
I’d expect CEO Nicholas Woodman to at least be asked on the Q3 conference call whether GoPro might entertain an acquisition. I’d also expect that Woodman won’t directly answer the question. Still, a strong quarter here can stoke takeover hopes — and keep the recent rally going.
The Short-Term Case for GoPro Stock
And so I can see the case for GPRO stock as a trade ahead of earnings. GoPro probably doesn’t need to show that much in the report. If the company can maintain full-year guidance, it will convince investors that the HERO8 delay is relatively unimportant. It’s worth noting in that context that the GPRO stock price was above $5 before that cut was made. A return to those levels would suggest 10%-plus upside from current levels.
A solid earnings report also allows takeover speculation to keep running for at least the rest of the year. Fourth-quarter earnings aren’t until February, and the company almost certainly wouldn’t update its outlook until January, if it does so at all.
Simply put, this is a “no news is good news” type of quarter. Even the lowered full-year guidance still suggests progress. Full-year revenue over $1.2 billion would be the company’s highest sales since 2015. Adjusted EPS is expected to return to a profit from 2018’s loss of $0.23.
The GPRO stock price actually cleared $7 back in May, more than 50% above the current price. I’m not sure I’d expect a rally back to those levels in the next two months. But at the least, a solid — and quiet — third-quarter report can keep the recent bounce intact.
The Long-Term Problem for GoPro Stock
All that said, the long-term problem for GPRO stock still holds. I’ve been a bear toward GPRO for years now, and even below $5 I’m not close to ready to turn bullish.
After all, significant problems remain. Yes, the company is guiding for adjusted EPS of $0.30-$0.35 this year. But that figure excludes, by the company’s own calculation, $0.27 in share-based compensation. That’s a real cost. Adding that back, GoPro remains barely profitable.
Revenue is growing this year. But that follows three consecutive years of declines (even if those declines admittedly have been modest in the last two years). The midpoint of 2019 guidance still suggests just a 4% increase from 2016 levels. Barely 1% annualized revenue growth in a strong economy is not good enough for a discretionary product.
And profit growth going forward likely depends on revenue. Gross margins are not terribly far from the 36-39% long-term range CFO Brian McGee cited on the Q4 conference call. GoPro already has cut operating expenses, which should decline year-over-year in 2019.
Adjusted EBITDA margins here are thin: about 7% at the midpoint of guidance. And so it doesn’t take much improvement to materially change the profit picture. 200 basis points in improvement, all else equal, increases Adjusted EBITDA by 28%. But it likely gets adjusted EPS to $0.50 — and that in turn suggests a GPRO stock price potentially above $6.
The flipside, however, is that any margin compression sends GoPro back toward breakeven, even on an adjusted basis. Add revenue declines to the mix and the reversal gets even worse.
In other words, this is a pure revenue story at this point. And that’s not yet a story I’m willing to buy. GoPro simply hasn’t proven it can drive consistent top-line growth, or even that it consistently execute.
Solid third-quarter earnings would be a major step toward inspiring confidence on both fronts. But long-term investors should bear in mind that even with a good Q3, there’s still a lot more work left for GoPro to do.
As of this writing, Vince Martin has no positions in any securities mentioned.