- GoPro stock is now up nearly 26% since the company's Q2 earnings release, on expectations of a turnaround.
- There are two sides to this, and the turnaround story is fraught with both risks and rewards.
- There's an opportunity here, but it might not be suitable for conservative investors.
Shares of San Mateo, California-based action camera maker GoPro (NASDAQ:GPRO) are now up nearly 26% since the company's Q2 earnings release. The stock's recent rally has been fueled by speculation of an inflection point in its revenue and earnings decline, and the anticipation that's building up around its upcoming product launches. While some data points are encouraging, there are still two sides to this turnaround story. There's an opportunity here, but it might only be suitable for investors who are willing to speculate.
GoPro's Turnaround Case
Let's start with key takeaways from the earnings release that triggered the initial rally, and then move on to see what else GoPro has going for it.
GoPro's Q2 Earnings
GoPro's Q2 results weren't great per se. It was another quarter of sluggish camera sales, with revenue and unit sales approximately halving over the year ago, while losses continued to be heavy. However, in the context of what's been happening with GoPro, the results signaled that the company might have reached an inflection point.
While unit sales inched higher sequentially from GoPro's multi-year low of 701,000 units in Q1, to 759,000, GoPro's gross margins rebounded to more familiar levels. Gross margins rose for the second quarter in a row, from a low of 29% in the last quarter of 2015, to 42% in the most recent quarter. While operating and net losses were still heavy at 50% and 42% respectively, both of these numbers were also better than the company's multi-year lows in Q1.
The highlights of GoPro's performance though, were encouraging trends pertaining to inventory and sales channels. GoPro's inventory pile up dropped nearly 60% compared to the year ago, and approximately 70% from its peak levels in Q3 last year. What's more, sell-thru (units shipped by retailers to buyers) was 10% higher sequentially, and 50% higher than sell-in (units shipped to retailers by GoPro) for the second quarter on the trot, reducing channel inventory by 35% sequentially, as per the company's release.
These trends were important for two reasons. First, the higher sell-thru, which indicates faster movement of GoPro products off the shelves of retailers comes in the backdrop of the company's move to eliminate entry level products from its product mix. What the trend indicates is that the move didn't backfire, and that GoPro managed to improve unit sales in spite of the higher ASPs (Average Selling Price) resulting from the move.
Second, and more importantly, reduced inventory levels at GoPro and in its sales channels have cleared the way for its much anticipated upcoming launches, the HERO5 action camera and the Karma drone.
The Upcoming Launches Of HERO5 And Karma
There's a fair amount of anticipation building up about GoPro's upcoming launches, and as is most often the case, the most optimistic voice is that of the management. So, let's start with what GoPro CEO Nicholas Woodman had to say in the company's earnings release:
“HERO5 and Karma will contribute to the largest introduction of products in our history, all in time for what we believe will be GoPro’s most exciting fourth quarter, ever -- a quarter where we expect to return to profitability.”
More recently, GoPro's Federal Communications Commission filing a week ago generated a huge amount of interest and speculation regarding the HERO5, and is the likely reason why the company's shares have notched up a handy 5.6% gain this week. As per a report on Valuewalk, the HERO5 is expected to be lighter and thinner, packing in features like a built-in GPS and 802.11ac Wi-Fi. In fact, there's even speculation that the HERO5 could have dual lenses for 360-degree capture and a significantly redesigned touchscreen dashboard as per a leaked video.
While it's important to note that some of this is pure speculation, it's clear that there's a good amount of interest and anticipation building up for GoPro's HERO5. At least in terms of inventory levels and sell-thru trends, it's all coming together at a good time for GoPro. But should you get excited? Not yet.
GoPro - The Investment Angle
So, GoPro has a few things going for it, and to speculate on the possibility of a turnaround wouldn't be completely irrational. What's more, the stock isn't terribly expensive either, given that it trades at about 1.7X trailing twelve month sales, way lower than its historical peak of over 6X. It's also noteworthy that Ambarella (NASDAQ:AMBA) which relies on GoPro for ~30% of its revenue, and has a significantly smaller (less than 1/4th) revenue base, trades at a very similar market cap of $2 billion, at 6.6X sales.
There's an opportunity here. However, the opportunity is fraught with risks. Even as GoPro stands in readiness to launch its much-anticipated HERO5 and Karma drone in time for the holiday season, there's one big element that could make or break the upcoming launches, 'pricing'.
Most of us remember how GoPro had to eventually halve its price on the HERO4 Session camera, from $399 at launch, to $199, late last year. If GoPro slips up this time, the result could be disastrous. With a smaller product mix, more rides on each product, and more so at a time like this.
As Dan Gallagher's post on WSJ aptly put it, "It helps that GoPro’s investors are well versed in the art of the tumble." However, investors would do well not to overlook the downside risks that prevail. Sitting on the sidelines now could mean that you won't catch the bottom, but given the risks, you might be better off catching this stock on the way up, or staying away altogether if things go wrong.
As it stands, GoPro stock is best suited for speculative investors who understand the risks.