Earlier this week, the equity research arm of JP Morgan wrote, “Low expectations and elevated short interest sets up for a potential move on solid print,” adding that, “[earnings] expectations are muted, short-interest remains quite elevated, so the stock might be set up for a short squeeze on solid results.”
The company in question? GoPro (NASDAQ:GPRO). As of the latest tally, 24.2 million shares of GPRO stock are sold short — roughly 24% of the float — making it a potential powder keg of bullishness if the company’s quarterly results can scare the doubters into covering their short trades by buying the stock back, en masse.
Of course, sometimes traders know exactly what they’re doing, making the right call even if the professionals don’t see it.
That may have been the case Thursday. Even on just relatively so-so results, GPRO stock was storming higher immediately after the news hit, but the rally turned red just a few moments later and the stock was still nursing a loss when the markets closed (though it is up in after-hours trading).
GoPro Earnings Recap
For the quarter ending in June, GoPro turned $283 million worth of revenue into an operating loss of 15 cents per share versus analyst expectations for a loss of 22 cents per share and sales of $270.2 million. In the comparable quarter from a year earlier, the company reported a top line of $296.5 million and a loss of nine cents per share of GPRO stock.
Despite the slight sales lull, investors initially saw the glass as half-full rather than half empty, bidding shares up on the order of 8% in Thursday’s after-hours trading action before letting it slide to the tune of 5% at the time of this writing.
CEO Nicholas “Nick” Woodman said of his company’s second-quarter results: “GoPro is executing. We are on track; sell-through is solid in all regions indicating strong demand, and we believe GoPro will be profitable in the second half of 2018. Our plan is to exit the year with an improved margin profile we believe translates into a profitable 2019.”
If that’s going to happen, something significant has to change for the better between now and then.
Drilling Down
Woodman may see rays of light poking through, but they’re difficult to see when scrutinizing the detailed items on the company’s financial statements.
Chief among the lingering concerns is, despite a 5% dip in revenue, cost of revenue edged higher, from $190.9 million to $199.3 million. Non-GAAP gross profits, as a percent of revenue, fell from 36.2% to 30.8%. The company’s non-GAAP operaring loss grew from 9.2 million to $16.7 million, while it’s adjusted EBITDA swung from a positive $5.1 million a year ago to a negative $8.7 million last quarter.
Operating expenses — where GoPro can do the most to control costs and beef up the bottom line — fell from $130.6 million to $114.2 million, though it’s likely the company will continue working those costs down.
Regardless of the second quarter numbers, however, this isn’t the GoPro of just a few years ago. Woodman isn’t the CEO he was just a few years ago. He recently conceded in an interview, “When we took the company public, I believed that part of my job was to envision this ultimate version of GoPro — what it could ultimately become — using all of my imagination. But we thought that we were really smarter and more creative than we were.”
The newly-garnered wisdom has translated into insightful pricing strategies too. In the same interview Woodman recognized “You need new products every year. And if you leave a product out, you have to discount that product by $100 if you want to drive sales.”
Yet, GoPro still seems largely unable to address its biggest headwind — mainly, that most consumers are content enough with the mobile camera found on their Apple (NASDAQ:AAPL) iPhone or Samsung Galaxy smartphones. The market for action cameras just isn’t that big and the upgrade/refresh cycle may not be robust enough to justify the company’s constant stream of new products.
To that end, it’s not clear what the company has in mind in the way of new or revamped products that will spark some much-needed revenue growth during the second half of this year. And, to the extent consumers are willing to shell out a few bucks for a standalone action camera, cheaper alternatives to GoPro’s wares are “good enough” in many cases.
Looking Ahead for GPRO Stock
Prior to the release of GoPro’s second-quarter numbers, analysts were modeling a loss of three cents per share on sales of $263.6 million for the quarter currently underway. And, for all of 2018, those pros were expecting revenue of $1.13 billion and a full-year loss of 33 cents per share of GPRO stock.
Those figures suggest a sales dip for both timeframes, but shrinking losses in both timeframes as well, as the company reduces waste and improves efficiencies.
Look for those numbers to be adjudged accordingly, in the wake of the Q2 report. More than anything, however, investors should keep their eyes and ears open for clarity as to what’s going to drive strong growth — and better margins — that the company has struggled to achieve thus far.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
