- GoPro reported a 35% jump in sales during the Thanksgiving weekend.
- GoPro also announced restructuring plans which will reduce its operating cost.
- Will the latest news change the overall investment thesis around GoPro stock?
GoPro (NASDAQ:GPRO) recently came out with a press release which showed that the action camera maker experienced strong demand during the Thanksgiving weekend. The release also stated that GoPro will be restructuring its operations with an aim of becoming non-GAAP profitable by 2017. The news had sent GoPro stock up by more than 3%. However, the stock has pared most of its gains since then. It has been a while since shareholders of GoPro have received some good news. The stock has tumbled more than 20% in the last one month. The latest news seems to have prevented GoPro stock from hitting its 52-week low. While the latest press release has brought in some relief, subsequent price action indicates that the news will not have much impact on the bearish sentiment surrounding the stock. After all, the total number of shorted shares account for 37% of the total float.
On The Road To Profitability?
The third quarter earnings results, supply issues and the Karma recall had put the management firmly in the spotlight. The crash in the stock price didn't help the matter either. Many investors and analysts expressed their displeasure with the management's "execution problems". The management seemed to have hurried into the Karma launch, only to be forced to recall the product, and the supply of Hero 5 has been inconsistent at best. With the restructuring bid, the management is trying to regain the confidence of investors. In its Q3 call, GoPro had stated its objective of becoming Non-GAAP profitable next year but had not laid down any measures to achieve it.
GoPro has announced that it will lay off more than 200 employees or 15% of its total workforce. It will also close down its entertainment division. The restructuring will cost GoPro between $24 to $33 million with $11 to $15 million in non-cash expenditure. According to GoPro, the restructuring will allow it to reduce its operating expenses to $650 million ($735 million in GAAP) helping it to become Non-GAAP profitable next year. (Also Read: Can GoPro Stock Bounce Back After Its Bad Karma?)
In its Q3 earnings call, GoPro has said that it expects to end 2016 with $780 million in operating expenses (a 16% reduction from the current year in spite of expected revenue growth). According to Yahoo finance, the current analysts' consensus estimate calls for a Non-GAAP EPS of -$0.24 in 2017, so if GoPro can report a positive EPS next year, it will be a solid beat. But the question still remains around the management's execution capabilities.
Strong Demand During The Holiday Season
GoPro also reported that it saw a strong demand for its product during the Thanksgiving weekend. CEO Nick Woodman had this to say:
"We have a lot of work to do to finish the quarter and our fiscal year, however our HERO5 cameras have been very well-received by critics and consumers alike," , "Both HERO5 cameras can now auto-offload new content to the cloud and our Quik mobile app makes accessing and editing your footage fun. Its clear consumers are excited about these new features."
Camera unit sales were up 35% YoY with major retailers while on GoPro.com the sales were up 33% YoY. In its Q3 earnings call, the company had reported that the sell-through mix of Hero 5 line was 75% in first four weeks. Considering that Hero 5 cameras are retailing at a higher ASP (Hero 5 at $299 and Hero 5 Black at $399) the actual dollar growth in sales is likely to be much higher.
GoPro has guided for around 44% YoY growth in its sales for Q4. So the Thanksgiving weekend numbers indicate that GoPro is on the way to meet or even beat its guidance. However, investors must keep few a things in mind. GoPro has to make up for the lost sales in the earlier part of the quarter when the sales were down due to lack of supply. So, GoPro reporting 35% unit sales growth during the Thanksgiving weekend may not be enough for the company to beat the guidance. (Also read: Can The Holiday Season Save GoPro Stock?)
In a warning of sorts, Ambarella (NASDAQ:AMBA) slashed its Q4 earnings guidance and also guided for revenue of $86 million against analysts estimate of $90 million. GoPro contributes around 30% of Ambarella's revenue. So the guidance cut indicates a possible slowdown in business from GoPro. Also, the questions around supply issues still remain. Any further disruption in supply will push the sales to next year or worse, may even frustrate the consumer.
Good Product But Not A Good Stock
In the statement, GoPro also said that "According to the NPD Group, since the launch on October 2, HERO5 Black has been the best-selling Digital Imaging device in the United States." The fact that GoPro remains the best selling digital imaging device in spite of the Karma fiasco and supply disruptions says a lot about the brand and the product. But a great brand may not be enough to ensure success. BlackBerry and Nokia too had a strong brand recall. GoPro needs to do more in terms of execution and planning. The Karma fiasco represents a lost opportunity to diversify its revenue source and decrease the risk. While the latest reports bring some relief to investors it's unlikely to change the overall investment narrative. GoPro stock remains a risky bet going into 2017.
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