It’s no secret that GoPro Inc (NASDAQ:GPRO) isn’t doing well. The action camera maker is set to announce first-quarter earnings Thursday, April 27, after the 4 o’clock bell; they’re expected to be a glass half-full kind-of-affair with revenue up year-over-year by more than 13% along with smaller losses, a combination that could have a positive effect on GPRO stock come Friday’s trading.
Those in the business media have a tendency to throw out suggestions and solutions for companies whose businesses are failing, like candy, as if we are the missing piece of the puzzle.
In early February, I wrote an article about Garmin Ltd. (NASDAQ:GRMN) and Fitbit Inc (NYSE:FIT) and whether a hypothetical long/short trade of the two stocks made sense. Ultimately, I came to the conclusion that GRMN stock was a good long-term buy, but Fitbit, given its $3 per share in cash, wasn’t a short.
“Yes, the shorts represent almost 36% of its float and its margins are about one-third Garmin’s, but with $3 in cash it’s got to be attractive to somebody in the industry — maybe even Garmin,” I wrote. “That should keep Fitbit stock from dropping much farther.”
In the wearables business right now, Garmin appears to be the knight in shining armor who saves the damsel in distress.
A Better Combination for GPRO?
Earlier in April, Motley Fool contributor Travis Hoium proposed a Garmin-GoPro tie-up, arguing that Garmin should spinoff its legacy assets in marine, aviation and auto into a separate company merging its smartwatches and fitness trackers with GoPro’s action cameras and drones, delivering an expanded line of outdoor and fitness products under one roof.
Brilliant.
An even better idea than my own because of the synergies available along with very little overlap between the two companies’ products. The problem is that Garmin probably has already pondered this possibility and concluded that it can develop a line of action cameras and drones on its own for less.
Garmin would likely have to pay around $1.6 billion for GoPro at this stage of the game based on a 20% premium to its April 25 closing price of $9.18. But even if it were open to paying this amount, it couldn’t get a deal done without the approval of GPRO CEO and founder Nick Woodman, who holds 76.9% of the votes.
Like the Fitbit founders, it’s unlikely that Woodman wants to sell at a significant discount to the $24 June 2014 IPO price for GPRO stock. Once a billionaire on paper, Woodman’s ego (all entrepreneurs have them) might prevent him from letting go.
Homegrown Solution for GoPro Stock?
No, the solution to GPRO’s problems lies within the four walls of its head office in California. Woodman said as much in March appearing on CNBC.
“We’ve recognized over the past couple of years that we need to focus keenly on one customer, and that is the person who buys a GoPro,” Woodman said on CNBC. “Sales are good. It’s all good signs that we are improving our business, and that’s something we intend to build on throughout the year.”
In addition to continuing to grow revenue in its core products, Woodman is committed to cutting costs. As I mentioned in the beginning, GPRO is expected to reduce its first-quarter loss to $0.44 per share from a loss of $0.63 a year earlier. Analysts estimate it will lose $0.08 per share in fiscal 2017, but return to profitability in 2018 at $0.13 per share.
In its Q4 2016 conference call in February, Woodman told GoPro stock investors that cost cuts would remove more than $100 million in annual operating expenses from its income statement in 2017 to less than $600 million. The last time the company’s operating expenses were around $600 million in 2015, it made money.
Bottom Line GPRO Stock
Unlike Fitbit, which I believe will continue to lose market share, GoPro has managed to hang in there and maintain its piece of the digital camera pie. Of the two companies, Fitbit is the one I believe is in need of a suitor.
Nick Woodman can become a billionaire once more by giving its customers what they want without overspending to deliver. The company has made money in the past; it can do so again.
The solution for GPRO stock and the company itself lies within.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
