3 Reasons GoPro’s Stock Could Fall

Before you buy a stock, you should always develop a bullish and bearish thesis. Here's the bearish perspective on GoPro.

Aug 13, 2014 at 9:43AM

G

Be a heroic investor, but understand the risks. Source: GoPro's S-1.

Shares of action camera maker GoPro (NASDAQ:GPRO) have been on a ride so wild it may appear in its own video. After an initial public offering price of $24 per share in June, the stock quickly rocketed up to nearly $50 per share. However, after the early euphoria, shares quickly fell to their current price of approximately $38.

As often occurs with new and volatile companies, opinions vary widely as to its future path. As such, it pays for potential investors to consider both a bullish and a bearish argument before deciding whether to buy the company. Here are three reasons why GoPro's stock could fall further.

It isn't a media company, despite its best intentions
GoPro has recently touted its media intentions, going as far as calling itself a media company during the IPO process. Just how much money was GoPro making from content at that time? Well, according to its S-1: "As of December 31, 2013, we had not derived revenue from the distribution of, or social engagement with, our content on the GoPro Network."

In contrast, although not specifically broken out, Google's YouTube revenue was pegged at $3.5 billion during 2013; after payments to partners that number drops to $1.5 billion. Even if GoPro can grow revenue from zero to one-tenth of YouTube's revenue -- a nearly impossible feat -- assuming all other factors are equal this would add $350 million per year to GoPro's bottom line. Since we only have a half-year until GoPro's annual results, we'll halve that to $175 million. Since analysts estimate GoPro's revenue to be $1.24 billion for this fiscal year, the additional $175 million would be roughly 12.3% of its total.

Top and bottom-line growth is nothing
We all know the seduction of investing in IPOs: You get in on the "ground floor" of a high-growth company and rake in the benefits. Well, GoPro isn't necessarily high growth when you consider a year-over-year comparison between the first two fiscal quarters of 2013 and 2014.

Fiscal QuarterQ1' 13Q2' 13TotalQ1' 14Q2' 14TotalGrowth
GoPro Revenue 255.1 177.1 432.2 235.7 244.6 480.3 11.1%

Source: GoPro's 10Q's and S-1. Figures in Thousands.

As you can see, in 2014 GoPro increased its revenue 11.1% year over year. A solid increase, absolutely, but not exactly groundbreaking when you're looking at a company that is trading at a price-to-sales ratio of nearly three times on a trailing-12-month basis.

GoPro was actually profitable prior to its IPO, but that trend has reversed. After reporting net income of nearly $50 million in the holiday-laden fourth quarter of 2013, GoPro reported another profit of $11 million in its first quarter and a loss of nearly $20 million in its recently reported second quarter. On a year-over-year basis, this year's first and second quarters were both worse than last year's results, which saw the company report a $16.7 million profit and a $5.1 million loss, respectively.

How differentiated is this product?
Go-Pro must also watch its back for competition. Just a mere decade ago, digital cameras were all the rage. However, with the addition of cameras in smartphones and tablets, that product category has essentially been disrupted.

Although the camcorder market is improving, in part due to GoPro's success, each new phone iteration has the potential to encroach upon its territory. So far, GoPro has done well by filling a niche in the camcorder market--the company's market share has exploded from 11% in December 2011 to 45% in 2013.

But GoPro understands this puts a large target on its back. From the S-1:

Moreover, smartphones and tablets with photo and video functionality have significantly displaced traditional camera sales. It is possible that, in the future, the manufacturers of these devices, such as Apple and Samsung, may design them for use in a range of conditions, including challenging physical environments, or develop products similar to ours.

If a multiproduct giant such as Apple or Samsung entered this action camcorder business or brought that functionality to its smartphone lineup, GoPro could really suffer. However, the company appears to be cozying up to potential rival Microsoft by specifically mentioning their recent partnership in its S-1. It appears that Microsoft is returning the favor by working on video stabilization algorithms for GoPro cameras in its research labs.

Final thoughts
Before you purchase a company, you should always prepare both a bullish and a bearish thesis. For such a highly valued company, GoPro faces issues on a host of fronts, including monetizing its content, continuing to grow a top line that is fully dependent on a single product with minor variants, and possible competition from deep-pocketed rivals. It appears GoPro's wild ride will continue; I just hope someone's filming it.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers