One Big Reason to Avoid GoPro Stock

GoPro is a hot tech company with exciting products, but it's missing a big, wide moat for protection

Source: GoPro

Since coming public on June 25, shares of GoPro (GPRO) stock have been about as good as you could want. GoPro stock priced at $24 and quickly hit a high of nearly $50.

Even with a recent dropoff, GPRO still is trading for a robust $42.

So … why does it feel like a wipeout is just around the bend?

Where GoPro (GPRO) Falls Short

It’s understandable why GPRO stock has staged such a nice run. GoPro’s products — which involve a line of durable video recorders and cameras for action sports — have many loyal customers who are willing to pay pretty lofty prices.

But the flip side to such a run is that GoPro stock has reached nosebleed levels. At current prices, GPRO trades at 83 times earnings and five times sales. It’s a niche camera company that’s valued at a hefty $5.2 billion.

Sure, some companies — especially tech — are able to sustain lofty valuations. Take Facebook (FB) and LinkedIn (LNKD) for example.

But those same companies have benefited from strong moats — those economic advantages that other companies simply don’t have.

And that’s something GoPro can’t claim.

GoPro is reliant on its brand to stay on top, and in many ways, it appears to think of itself as a media company. But that’s a stretch considering all revenues come from selling products.

For the most part, the company is relying on its brand to stay on top. In fact, GoPro thinks of itself as a media business, not a hardware manufacturer — a stretch for a company that gets all of its revenues from selling products.

While GoPro does have a strong presence on Google’s (GOOG) YouTube, Facebook and Twitter (TWTR), it will take time for it to monetize its social media efforts. Even then, generating, say, $100 million wouldn’t move the needle much considering it already posts more than $1 billion in revenues annually.

Another criticism: The GoPro brand has been around for 10 years, so while it’s established, it’s also old enough to worry about “cool” factor. That’s the kind of weakness that can be capitalized upon by hungry entrepreneurs who saw the hugely successful GoPro IPO and want a piece of the action.

And going back to hardware, because the company does play in the camera space, it could come under pressure from any number of operators. There’s Garmin (GRMN), Sony (SNE), Canon (CAJ) and a host of others. While many don’t have GoPro’s cool factor, they do have tremendous engineering teams, global distribution … and the ability to aggressively cut prices.

Also, don’t count out the possibility of an entry by Apple (AAPL) and Google, both of which recently launched software platforms around wearables — technology that should make it easier for entrepreneurs to develop their own GoPro-esque systems.

So what about GoPro’s intellectual property? Well, if you look at the S-1, you’ll see that GPRO has been putting together a nice portfolio of patents, which cover areas like physical structures, image processing, operational firmware and software and post-processing software. But I’d quickly remind you that GoPro’s competitors aren’t exactly short on intellectual property, and that patents are far from foolproof — ask Nokia (NOK) and BlackBerry (BBRY) how bulletproof their intellectual property made them.Bottom Line

All of this sounds bad, but none of it explicitly implies that GoPro stock is doomed for a sudden collapse. Despite its big slip, GPRO is recovering today, and momentum remains on its side. Moreover, the IPO probably will stoke even more interest in the company’s product.

But over time, it will be tougher to maintain high margins as competition will inevitably move into the market. Not to mention, the market might have some natural limitations as well. (GoPro cameras are admittedly awesome, but they aren’t exactly for every lifestyle.)

Looking forward GoPro stock could be a rough journey for investors, especially with a valuation that already accounts for a best-case scenario.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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