Is There A Hope For GoPro Inc Stock After The Disappointing Outlook?
GoPro (NASDAQ:GPRO) stock crashed yesterday after the US-based camera manufacturer reported mixed earnings for its Q4 2016. But more than the mixed earnings, it was the disappointing outlook which did the damage. As we have mentioned before, GoPro stock is very volatile and given to wild swings. The movement in GoPro Inc stock is huge, in both the directions. Going into the earnings, GoPro stock had gained more than 25% on the news of the relaunch of Karma drones and a slightly bullish note by analysts at Pacific Crest. Given the run, it was expected that the stock would crash on any disappointing outcomes. GoPro Inc stock is down around 12% in the pre-market trade.
GoPro Stock Gets Rating Downgrade After Disappointing Earnings
The disappointing earnings earned GoPro stock several price target cuts with Raymond James downgrading the stock to underperform. Piper Jaffray analyst Erinn Murphy reiterated her Underweight rating after the mixed results and disappointing guidance. She maintained her price target of $8 for GoPro stock, which is around 17% lower than the pre-market price of $9.63 GoPro stock is currently trading at. Even R.W. Baird cut GoPro stock rating to underperform with a price target of $6. GoPro stock has next support at 50 day SMA level of $9.45
GoPro Inc Missed Heavily On Revenues
The action camera maker reported a revenue of $540 million way lower than analysts expectations of $577 million. GoPro's own guidance for revenues was between $600 million and $650 million. Though the guidance included revenue from Karma drones, which the company was forced to recall. On the profitability front, GoPro reported a non-GAAP EPS of $0.29 which was higher than analysts' consensus of an EPS of $0.24 and in line with its own guidance. On GAAP basis, GoPro Inc reported a loss of $116 million. The GAAP earnings were impacted by restructuring charges and full valuation allowance.
GoPro recognized $102 million in full valuation charges. A company is required to recognize full valuation charges if there is a 50% probability that it will not able to realize some portion of its tax assets. Companies like GoPro Inc which diligently generate losses instead of profits are allowed to carry forward their losses and recognize deferred tax assets which can be used to offset income taxes when the company becomes profitable. GoPro also took $37 million restructuring charges, mostly related to closing down of its media business and laying off 1/3rd of its workforce.
Action Camera Market Saturating?
During the quarter, GoPro shipped 2.28 million units, compared to 2 million units it shipped in Q4 last year. However, this was lower than 2.38 million units it shipped in Q4 2014 when the company had launched its flagship Hero4 camera. Clearly, the "production issues" which the company faced at the beginning of the quarter hurt its sales. During the conference call, GoPro CEO Nick Woodman said:
"In our November call, we detailed how our teams overcame initial HERO5 Black manufacturing issues and quickly ramped production. However, the initial scarcity had a knock-on effect, resulting in retailers canceling marketing support for the HERO5 Black launch. While the impact of less marketing is hard to quantify, we believe we missed an important opportunity to capture perishable demand during the holiday."
While the initial manufacturing issues did have an impact on the sales, many analysts are of the view that the action camera segment is itself getting saturated which is impacting GoPro's sales growth. Also, the competition in this segment is intensifying. GoPro certainly remains popular, according to NPD Grop's retail tracking service 3 of the top 5 products in the digital camera/camcorder category are GoPro products, but the segment has seen an entry of many products with very competitive pricing.
But more than the current earnings, it was the Q1 2017 guidance which disappointed the investors. GoPro guided for its Q1 revenues to come in the range of $190 million to $210 million, way lower than analysts estimates of $267.56 million. The guidance on the margins front was also disappointing. GoPro expects gross margin to come in low thirties compared to almost 40% gross margin it reported for the previous quarter.
What Next For GoPro Stock Investors
For more than a year, GoPro stock has been a risky bet, and given the disappointing earnings and downbeat guidance, the stock is likely to remain risky going forward. Many investors are having heavy expectations from Karma drones, which the company relaunched yesterday. However, the success of these drones is far from given. The commercial drone industry is fast growing but very competitive. Karma is likely to face stiff competition from DJI's "Mavic Pro" which scores better than Karma on some performance parameters. In the first two weeks, when it was available for sale, the Company was able to sell just 2500 drones, and that was at the peak of Karma hype. With the negative baggage that the drone carries due to its recall and the fact that it is GoPro's first drone, consumers are likely to remain cautious. All in all, investors must avoid GoPro stock for now.
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