GoPro stock remains a risky bet in spite of the recent momentum. Investors must wait till earnings to get a better picture.
GoPro (NASDAQ:GPRO) stock got a big boost yesterday after analysts at Pacific Crest raised their estimate of unit sales for Hero cameras during the fourth quarter. The stock rallied following the report, gaining more than 11% intraday before settling for a 7.7% gain in yesterday's trade, on more than double the usual volume. Some part of yesterday's jump could be due to short covering. GoPro stock has been on an uptrend since the beginning of this year, gaining around 8% before yesterday's trade. GoPro stock picked up momentum earlier this month when the action camera maker announced that it will be relaunching its Karma drones soon. The stock is up by more than 16% YTD, handsomely beating the Nasdaq Composite (INDX:COMPX), which has returned around 4% in the same period.
Better Than Feared Sales For GoPro
In the report, Pacific Crest analyst Brad Erickson has said that his channel checks indicate that sales of GoPro cameras turned out to be bettered than feared. He raised his unit sales estimate of Hero cameras by 10% from 1.9 million to 2.1 million. He also raised the ASP (Average Selling Price) estimate. To quote him from the report:
"In light of better-than-feared sell-through, we are raising our unit estimates by a bit more than 10% to 2.1 million units in Q4 from 1.9 million and are raising our ASP estimate slightly as our store checks showed an impressive ability to pivot point-of-purchase displays to selling the Karma Grip ($300 electronic stabilizer) when it became clear the Karma would not be launched. Further, we are removing Karma from our Q4 estimates and now expect volume shipments to begin in 2Q17. For 2017, we expect 150,000 drone shipments to contribute $88 million in revenue."
GoPro had already indicated that its action cameras were enjoying strong demand during the holiday season. In a press release the company had said that camera unit sales were up 35% YoY with major retailers, while on GoPro.com, sales were up 33% YoY. In the release, the company has also stated that the sell-through mix of higher margin Hero 5 line of cameras was about 75%.
The Hype Around Karma Relaunch
Apart from strong fourth quarter estimates, what got investors excited were estimates of sales for Karma drone. In the report, Erickson also stated that he expects GoPro to re-launch Karma in Q2 and estimates GoPro to sell around 150,000 drones, earning the company additional revenue of $88 million. While the launch of Karma will definitely bring in additional revenue, it is far from clear what will be the size of the revenue. It will be advisable for investors to wait and watch how the re-launch plays out.
While the opportunity in the consumer drone market is huge - it is estimated to reach a size of $4.19 billion by 2024 - so are the risks. The heavy competition, entry of low cost manufacturers and commoditization of the drone market has put heavy pressure on margins. Parrot SA, the second largest manufacturer of non-military drones had to chop a third of its work force due to "insufficient margins" and weak sales. The drone market is heavily dominated by Chines drone manufacturer DJI. GoPro might find it very difficult to compete with DJI, since DJI is a well known brand in this field and its recently launched "Mavic Pro" outperforms Karma on several fronts. In spite of the hype surrounding the Karma drone, GoPro was only able to sell 2500 units in the two weeks before its recall. This number is quite low even after accounting for supply side issues. And that was before the recall.
This doesn't mean that GoPro may not able to sell the drones at all. The company has a strong, loyal following and brand image. Also, the Karma is likely to enjoy strong demand from the existing owners of Hero Cameras. However, a runaway success for this product is far from assured.
Should You Buy GoPro Stock Now?
Yesterday's report from Pacific Crest was much awaited by GoPro stockholders who have seen their stock heavily underperform the market in the last one year. The bearish sentiment around the stock has been crystallizing since the recall of GoPro's Karma drones, as can be seen from the rising short interest. But in spite of the slightly bullish report, GoPro stock remains a risky bet. No doubt, Hero Cameras are the best in their segment by far, but there are concerns emerging that the action camera market itself may be saturated and the success of Karma drones are far from a given. In the same report, Mr. Erickson has stated that:
“While 4Q16 and early 2017 will likely show some growth given how GoPro under-shipped the channel in 2016 due to excess inventory,” , “this near-term dynamic does not change our longer-term view that this market is saturated.”
GoPro stock is currently trading at $10.3, which is already 8% higher than the midpoint of Erickson's fair value range of $9-$10. Also, GoPro stock is very volatile and susceptible to wild swings. It could easily pare all its gains on any negative news as seen in the past few months. GoPro is scheduled to report its Q4 earnings on 2nd February, and investors would do well to wait till the earnings before entering the stock.
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