- GoPro stock is down almost 15% since its Q3 earnings, on disappointing outlook and the Karma recall.
- Hero 5 cameras continue to experience strong demand. But supply side issues persist.
- Can GoPro stock overcome its bad Karma?
In my previous article on GoPro, before the earnings, I had said that GoPro is a very risky stock and one must wait until the earnings before buying the stock. Well, the earnings weren't good, the outlook was bad and the news that followed was worse. GoPro stock is down almost 15% since it reported disappointing Q3 earnings and the company has no one but itself to blame for this disaster. The recall of the Karma drones has badly tarnished the "GoPro Brand", one of the strongest selling points thus far for the company. There are also questions surrounding the management and corporate governance. All in all, the recent events have been disastrous for the company and its investors, with many analysts almost writing off the stock. Can GoPro overcome its bad Karma and fly again?
A "Note 7" Moment For GoPro
On November 8, when everyone was preoccupied with the presidential elections, GoPro issued a press release, stating that it is recalling all its flagship Karma drones which it has sold in last two weeks. In the press release the company stated that:
"GoPro Inc. today announced the recall of the approximately 2500 Karma drones purchased by consumers since October 23. The recall was announced after GoPro discovered that in a very small number of cases, Karma units lost power during operation. No related injuries or property damage have been reported."
This is a "Note 7 " (Samsung) moment for GoPro. Instead of a phone catching fire during a flight, you have a flight (drone) suddenly losing its power and crashing down. A drone weighing 2.2 pounds falling from 20-30 feet in the sky can do quite some damage to property and people. Luckily for GoPro, no related injuries or damages have been reported. But it is clear that GoPro failed to do adequate safety checks, in a haste to release the drones before the holiday season and beat the competition. Like in the case of Samsung Electronics (OTC:SSNLF) the issues with Karma drones will immensely benefit its competitors.
This news, coming on the back of a disappointing earning and a weaker than expected guidance was the final straw for many investors. The stock sold off following the press release and earned downgrades and price target cuts from several analysts.
While monetary cost of the recall and reimbursement is not expected to be large, as only 2500 Karma drones have been sold (strong demand?), it will have larger repercussions. One of the strongest selling points for the company has been its brand, and the recall of its flagship product is definitely not going to help the company's brand image. GoPro was heavily banking on its brand and customer loyalty for Karma sales. The company has no one but itself to blame for the mess it is currently in.
It was imperative for GoPro not to mess up with the latest releases (as it did with Hero 4 camera), as a lot was riding on these two products. The importance of a successful launch could not have been over emphasized. It was the buzz around the launch of Karma and Hero 5 camera's which had brought life to an almost dead company. The stock had gained more than 70% at the peak of the frenzy. Karma was also an important opportunity for the company to prove it's ability to move into different markets and diversify its revenue sources. But the company failed to live up to the expectations.
Firstly, the Karma drone lacked the "follow me" and "obstacle avoidance" systems which were present in most of its rival drones. These features were an important attraction for the drone enthusiasts. And then reports emerged that the company is facing supply side issues. The waiting period for new orders was more than one month, following which, it came to light that the already shipped Karma drones have a manufacturing defect. It will be very difficult for Karma to bounce back especially since it faces a very strong competition from DJI's "Mavic Pro" drones. (See Also : Should You Buy GoPro Stock After The Recent Crash?)
Can GoPro Stock Bounce Back?
With the latest spate of bad news and the crash in stock price, the question on many investors' mind is "can GoPro stock bounce back ?". It will be very difficult. But there is still hope. GoPro's management must move with haste to restore the credibility of its brand and the Karma drones. Also, the flagship Hero 5 Camera line is enjoying strong demand. The share of Hero 5 line of camera's in the sales through mix was 75% compared to 54% for Hero 4 cameras in the first four weeks after the launch. And the bulk of GoPro's revenue is likely to come from the new flagship cameras.
However, even here the company has its work cut out. There are still significant supply side issues. GoPro stock continues to remain a very risky bet. A lot is still riding on the success of just one event. Considering the highly volatile nature of this stock, there will be wild swings on the upside too. These upsides will provide opportunities for risk-averse investors to get out this stock for the time being. On the other hand, the recent crash does provide an opportunity for an enterprising investor to take a position in the stock.