GoPro Earnings Q3 FY 15 Preview: Pessimism Overdone

  • GoPro is due to report Q3 FY 15 results on Oct. 28 after market close.
  • GoPro shares have been badly hammered this year as investors continue to fear that the company won't be able to sustain its strong growth momentum.
  • Although GoPro is likely to face near-term pressure due to the early launch of its new cameras and some underperforming brands, the long-term outlook remains good.
  • GoPro shares appear cheap considering the company's growth potential and investors should buy.

Action camera maker GoPro (NASDAQ:GPRO) is expected to report Q3 FY 15 earnings on Oct. 28 after market close. GoPro said during its last earnings call that it expects revenue of $430 million-$445 million the mid-point representing a 56% Y/Y increase. Meanwhile, the company expects EPS to clock in at $0.29-$0.32, the mid-point representing a hefty 408% Y/Y growth while consensus analysts’ estimate is for GoPro earnings of $0.22.

GoPro has managed to soundly beat expectations for the last our consecutive quarters, and investors can expect the company to extend that streak.

GoPro Earnings Surprise History

Quarter End
Per Share
EPS* Forecast
Jun2015 07/21/2015 0.25 0.14 78.57
Mar2015 04/28/2015 0.11 0.08 37.5
Dec2014 02/05/2015 0.85 0.62 37.1
Sep2014 10/30/2014 0.06 0.01 500

GoPro stock has been badly walloped this year, with the shares tumbling 33% in September alone after Ambarella (NASDAQ:AMBA), the company that manufactures the video chips that GoPro uses in its cameras, delivered mixed second quarter earnings and issued weak guidance. GoPro stock is down 54.5% YTD.
GPRO stock chart

Source:GoPro Stock Price Data by

Several top analysts including Morgan Stanley and Piper Jaffray have recently issued severe price target cuts on GoPro. Morgan Stanley cut GoPro’s PT from $62 to $35 citing weak sales of HERO4 Session, one of GoPro’s latest video cameras. Meanwhile Piper Jaffray cut its PT from $54 to $25 citing GoPro’s recent price cuts on HERO4 Session, weak consumer demand, and margin pressure.

But it appears as if the market and the analysts could have overreacted to perceived weaknesses. It’s worth noting that GoPro has not lowered its own guidance in the midst of all this pessimism. Ambarella blamed its weaker-than-expected guidance on the timing of the launch of HERO4 Session and HERO+ LCD video cameras and not on weak demand. GoPro launched the two cameras during the second quarter instead of the third quarter as it usually does with new cameras.

I analyzed Morgan Stanley’s PT cut in this article here. The analysts, as well as Piper Jaffray, seem to be attaching too much importance to the underperforming HERO4 Session. GoPro recently cut the price of HERO4 Session by $100 to $299. Morgan said that customers prefer Hero4 Silver’s LCD screen to HERO4 Session’s smaller form factor. I explained in the article that the impact of one brand cannibalizing another is usually limited. In the case of HERO4 Session, HERO4 Silver retails at the same $399 price point as HERO4 Session before the price cut. The damage is, therefore, likely to be limited to the impact by the lower price point.

Citi had this to say about the possible impact of the price cut:

We estimate the price cut could impact corporate gross margin by ~3 points until the inventory of the HERO4 Session is worked through, assuming 15% of total sales are being driven by the Session priced at $300 (the GM impact would be ~6 points if 30% of total sales are driven by the $300 Session).

GoPro had said that it anticipates third quarter gross margin to increase by 150 basis points to 46% as it expected 50% of its sales to be driven by its three premium models that retail at $400. Assuming Session is driving 20% of sales and HERO4 Silver sells about 30% better than expected, the impact on gross margin might be limited to only 2 points compared to the company’s guidance.

The early launch of the new cameras this year has led many analysts to lower their Q4 targets since the sell-in of the new products happened during the third quarter instead of the fourth quarter last year. This is the only real headwind that I can readily identify with. Morgan Stanley’s assertion that people will continue using their smartphone cameras because GoPro’s cameras sport inferior video editing tools compared to those by iOS and Android smartphones does appears to be a stretch.

Bottom line

The massive selloff has GoPro shares trading at a cheap 15 times forward earnings compared to a range of 30-50 they traded in earlier in the year. The S&P 500 is trading at an average forward PE of 17, meaning that GoPro shares are or the first time cheaper than the market average. Considering the GoPro is expected to grow earnings at a 15% CAGR over the next five years while revenue growth is expected to remain robust, GoPro shares look like a strong buy.

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