GoPro Inc. Faces An Uphilll Climb After Q1 Earnings Wipeout

  • GoPro stock has been badly hammered after the company posted lackluster Q1 2016 results.
  • GoPro Inc.'s top line has been cut in half while the company's ballooning costs continue pressuring the bottom line.
  • Is GoPro stock now a good value play or a value trap?.

Expectations for GoPro Inc. (NSDQ:GPRO) were low coming into the company's earnings call, yet the company somehow still managed to disappoint. GoPro reported mixed Q1 2016 results that beat top line expectations but missed on the bottom line. The company reported revenue of $183.54M, a massive 49.5% Y/Y decline while non-GAAP EPS of -$0.63 was $0.03 lower than the consensus on Wall Street and compared poorly with EPS of $0.24 that the company posted a year ago.

Meanwhile, GoPro's gross margin tumbled 1,260 basis points to 32.5% compared to a year ago thanks mainly to deep Hero4 Session price markdowns. The market is currently flooded with cheap cameras from the likes of Xiaomi and Sony which has forced GoPro to cut prices on its Hero product series and consequently taken a big hit on the bottom line. Meanwhile, operating expenses climbed 37% despite continued headcount reductions. GoPro's headcount fell 3.6% Q/Q but climbed 37.8% Y/Y to 1,483.

Camera shipments fell 48% Y/Y to 701k though GoPro said that consumer sell-through was close to year-ago levels and 50% above sell-in as retailers continued to work through older inventory.

GoPro Inc. no longer provides quarterly revenue guidance. The company's management, however, reiterated its earlier guidance for full-year 2016 revenue to clock in the range of $1.35B-$1.5B (7%-17% Y/Y decline).

GoPro shares have been hammered after the earnings call, tanking 20% in what is again shaping up to be another pretty brutal year for GoPro investors. The shares are now down 45.7% YTD and 80.5% over the past 12 months.

GoPro 12-Month Share Returns

GPRO stock chart

Source: GoPro stock price chart by

GoPro Expanding into Mobile Space, Karma Delayed till Holiday Season

There were a few bright spots though in GoPro's latest report. The first is that the company is moving into the mobile space and plans to integrate its latest mobile video editing apps, Splice and Replay (now named Quik) into a single platform. CEO Nicholas Woodman said:

"Historically, we've seen it as a content-enabling platform for people that own a GoPro,"

"And now moving forward, we've expanded our view to look at GoPro as a platform to enable anyone with a GoPro or with a smartphone to help them create terrific content."

So GoPro is now trying to build a software ecosystem to support product sales and make its products more engaging. This is a good way for the company to differentiate itself from the competition.

But perhaps investors were more concerned with news that GoPro won't launch its much-awaited Karma drone till the winter holiday season. Investors have been hoping that drone sales will help GoPro at least limit the severe sales decline. But GoPro is not likely to have a walk in the park trying to break into the drone market. The drone market, just like the action video camera market, is now flooded with cheap knockoffs and is embroiled in severe price competition. Leading drone makers such as 3D Robotics and China's DJI have been laying off workers in a bid to stay afloat. 3D Robotics, the largest consumer drone manufacturer in the United States, has even stated its intention to exit the market soon.

Karma is unlikely to make much of an impact on GoPro's top line in 2016 due to the delayed launch and market saturation. Cowen & Co. analyst Robert Stone estimates that Karma will contribute only 2% to GoPro's revenue in 2016.

I, however, believe that the longer-term outlook for Karma is quite good. GoPro will effectively become the first camera manufacturer to pair its camera offerings with a drone. Bundling the two products is likely to be a cheaper alternative for consumers than buying the products separately which might give GoPro an edge over the competition. Moreover, GoPro says that Karma will be loaded with revolutionary features that will make it stand out. Additionally, the company has a pretty well-established distribution channel for its cameras which it will be able to use for its drones.

GoPro Stock: Value Play or Value Trap?

This is the million dollar question. GoPro investors are likely to suffer from an investor behavioral syndrome that financial advisors call get-back-itis. This is a situation where investors hang on to stocks that have lost a big amount of their value in the hope that they will recover at least some of the losses. But looking at GoPro's latest hammering tells you that Wall Street and investor confidence in this company is almost completely gone. A lot of bad news had already been baked into the stock, yet it has tumbled badly after the earnings report. So you can call a bottom on the stock at your own peril.

A 50% revenue decline is hard to take in. But what is particularly worrying about GoPro is that the company has slumped back to the red due to high R&D costs yet there is little to show for it. R&D expenses jumped 46% Y/Y to $77M (42% of revenue). Meanwhile, sales and marketing expenses expanded 41% to $79.4M. With these two major line items growing so fast, GoPro appears destined to continue posting losses over the next several quarters.

GoPro shares appear like good value after the severe hammering over the past 12 months. But trading at a PE ratio of 39.7 and sales growth in reverse mode, the shares are likely to remain depressed over the next 2-3 quarters.

GoPro is, however, making progress trying to develop new revenue streams and diversifying its product line and these efforts might start paying off before too long. The shares could be a good contrarian play for investors with a long-term investment timeframe.

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