Are The Latest GoPro Stock Downgrades Deserved?

  • GoPro stock price has moved lower after Wall Street chimed in with another batch of downgrades.
  • The downgrades hinge mostly on the under-performance of HERO4 Session, which is already well-documented and possibly fully-baked into GoPro shares.
  • How well-deserved are the latest GoPro stock downgrades by Wall Street?

GoPro (NASDAQ:GPRO) stock just cannot seem able to catch a good break. GoPro stock appears to be everyone’s pet rock and house of cards. Just a few days after GoPro stock rallied more than 12% after FBR said that the company's acquisition by Apple remained a looming possibility, Citi and Morgan Stanley have come out on an all-out attack on GoPro.

Citi was the first to open fire with this mea culpa for its previous GoPro Buy recommendation when the firm increased its PT from $63 to $90 in late July:

"Further analysis of recent data points as well as the HERO4 Session price cut to $200 on Friday December 4th, CEO Woodman’s appearance on QVC on Saturday December 5th, and his comments at an investor conference on December 9th (“when we moved the price [of the HERO4 Session] down to $299, it performed significantly better, but it was a bit of a status quo”) suggest demand for GoPro products is softening. While we initially thought GoPro would recover from the poor HERO4 Session sell thru (initially attributed to poor marketing/ launch timing), we are becoming worried that the poor sell thru could be a reflection of diminishing consumer interest in new GoPro devices/ features that GoPro is introducing. We note that the Session is a perfectly good product, and is the favorite GoPro device of the CEO and the CFO, so its lack of momentum in the marketplace at a $300 price point is a bit of a head scratcher."

Citi’s concerns about GoPro slashing the price of HERO4 Session by $100 for the second time in just two months appears genuine. The camera now effectively sells at just half its introductory price only six months after launching. The analysts correctly noted that that continued weak demand for HERO 4Session possibly reflected diminished consumer interest in the company’s products. But it could also mean that GoPro and the investing world had unrealistic hopes built around the fanciful little camera.

But it was the analysts’ second piece of commentary that proved interesting. Citi said that Nicholas Woodman’s appearance on QVC was a bad sign that GoPro’s cameras were likely proving to be a tough sell.

The general feeling among the investor community is that appearing on QVC dilutes the brand of a product. So Citi could have been saying tongue in cheek that the only reason why GoPro would stoop so low as consenting to appear on QVC was only if it had been badly crushed and could not think of another respite.

But appearing on QVC does not necessarily mean that a product is on its last legs or that doing so will dilute the strength of the brand. Many popular brands including SONY, DELL, HP, NIKON, CANON, and many other still-popular consumer brands have previously featured on QVC and are still going strong. While it can be argued that some of these brands are not as popular as they once were, it would be a stretch of the imagination to say they are anywhere near dead. For all their woes, HP and Dell remain the second and third most popular PC brands on the planet respectively in terms of market share, with Lenovo maintaining pole position. Sony’s video game consoles are the most popular in the world (the company recently divested its consumer electronics business) while Nikon and Canon cameras are still among the top-selling DSLRs (digital single-lens reflex cameras). GoPro itself featured on the QVC platform in 2005 when it was launching its first cameras yet there is no evidence that this move diluted the strength of the brand in any way since the company remains the most popular action video camera manufacturer on the planet by a mile.

Meanwhile, Morgan Stanley’s commentary on GoPro largely echoed Citi’s Hero4 Session concerns, but with an even more potent stinger. Morgan Stanley said that GoPro shares could be worth as little as $5 if the pricing pressure continued (GoPro shares are currently trading at $17.31). GoPro shares are already 72% down YTD. Morgan Stanley’s comments have resulted in GoPro shares tanking close to 10% in just one day, never mind the fact that the analysts did not bother to justify how they came up with the $5 valuation for GoPro.

At the risk of sounding like just another GoPro apologist, unsubstantiated comments like Morgan Stanley’s appear a bit irresponsible. HERO4 Session challenges are already well documented and quite likely more than fully baked into GoPro shares already. But investors keep forgetting that this is just one of the five camera’s the company launched during the second quarter.

I think investors are better served pondering Piper's Erinn Murphy report about spotting GoPro cameras selling at a huge discount on several e-commerce sites.

"In the last week, we have seen further price pressure on Amazon in addition to product popping up on several flash sales sites including Zulily, Groupon, and RueLaLa," she wrote, cutting her GoPro PT by $5 to $15. "Our concern is that gross margin, which is forecasted between 45.5%-46.5% in Q4 could be under pressure."

If Erin’s observations are accurate, then they imply that GoPro’s other cameras, not just HERO4 Session, are proving to be a tough sell. That’s a potentially bad situation. But investors probably won’t get a clue of just how bad the situation is until GoPro reports its next set of quarterly results.

GoPro’s third quarter results suggest that the company’s cameras are not as popular in the U.S. as they once were, but are still doing very well in other world markets:

  • EMEA revenue grew 180% yoy in 3Q to $157 million.
  • APAC revenue grew 80% yoy in 3Q to $53 million.
  • US revenue declined 7% yoy in 3Q to $191 million.
  • Company revenue up 43% Y/Y with gross margin up 230 basis points Y/Y to 46.8%.

Those kind of results hardly look like those of a dying company. A company like Netflix (NASDAQ:NFLX) derived 75% of its growth from international markets with its core U.S. market under-performing during the last quarter, yet the stock has remains a huge favorite with the investing community. GoPro’s growth runways may one day be curtailed, maybe by things like market saturation or even by competition, but the strength of the brand is still undeniable. I believe the market will before too long wake up to this reality.

I maintain the stock is grossly oversold at this point. GoPro’s price-to-sales ratio has declined from 9 a year ago to 1.5 currently. I believe there is good value in these shares right now.

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