GoPro Investors Can’t Ignore These 3 Key Problems

Let’s take a closer look at GoPro’s three key weaknesses.

Sep 2, 2014 at 6:45PM

GoPro (NASDAQ:GPRO) has loomed large in headlines recently -- the company recently introduced a $60 dog harness to let canines capture video, and fans are buzzing about its upcoming HERO4 camera.


Source: GoPro

GoPro's stock, however, has been a divisive topic among investors. Although the stock has more than doubled from its IPO price of $24, the company's lack of competitive barriers, widening losses, and high valuations have raised concerns. Let's dig deeper into GoPro's three main weaknesses to see if those concerns are justified.

Enemies at the gates
GoPro's biggest weakness is its lack of competitive barriers. Research firm IDC estimates that GoPro has a 47.5% market share in the action camera market, but the market is still young and fragmented. This means that smaller players will constantly try to launch cheaper devices to chip away at GoPro's market.

Polaroid recently launched the Cube, a $100 block-like video camera with a magnet with attaches to any metal surface. It can record 90 minutes of wide-angle 1080p video on a single charge, uses a 6-megapixel camera, and can be mounted almost anywhere. The cheap price of the Cube is troubling for GoPro, since its features are comparable or superior to the HERO3, which costs between $200 to $400. The $200 White Edition HERO3 can record 1.5 to 3 hours of video on a single charge, depending on usage, and uses a 5-megapixel camera.

Polaroid also recently launched the higher-end XS100i, which beats the HERO3 in both price and performance. The $180 XS100i sports a 16-megapixel camera, compared to the 12-megapixel camera on the $400 HERO3+ Black Edition. Both devices are waterproof, and can record continuously for 1.5 to 2.5 hours.


Polaroid's Cube (L) and XS100i (R). Source: Polaroid

If competitors like Polaroid are already delivering better performance for half the price, other competitors won't be far behind.

GoPro needs to cut costs to remain competitive
When that attack happens, GoPro's margins could crumble as it tries to fend off the competition. To preserve its margins, it needs huge manufacturing operations to produce more cameras quickly and cheaply.

GoPro's best potential partner is Foxconn, which acquired an 8.88% stake in the company in December 2012. Although many assumed that investment meant Foxconn would manufacture GoPro's cameras, the two companies still haven't signed a deal yet. For now, GoPro CEO Nick Woodman has signed with other smaller contract manufacturers like Taiwan's Chicony Electronics. Speaking to Bloomberg, Woodman also noted that GoPro could also afford to develop its own technology with its staff of 300, compared to a staff of only three prior to 2011.


GoPro CEO Nick Woodman. Source: Wikimedia Commons

But considering that GoPro's net loss of $19.8 million last quarter was nearly four times its loss of $5.1 million a year earlier, it's clearly having issues balancing its revenue with expenses. Research and development costs soared 108% year over year to $34.7 million, sales and marketing costs climbed 12% to $43.7 million, and general and administrative expenses jumped 484% to $41.2 million.

This means that when competitors start undercutting GoPro's cameras, the company's bottom line can't hold up unless it cuts costs through major alliances with giants like Foxconn.

Media is not the answer
Although GoPro's competitive and manufacturing issues remain unresolved, the company stubbornly believes that evolving into a media company will help it grow beyond action cameras.

That fledgling effort, the GoPro Network, is a video channel of user-submitted content that is hosted on Facebook, Instagram, Pinterest, Virgin America, Xbox 360, and Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube. During its IPO filing, the company disclosed that the network won't generate any material revenue in 2014, despite having 2.2 million subscribers on YouTube. The network is still growing -- last quarter, the number of GoPro videos published on YouTube rose 160% year over year, views rose 200%, and total minutes watched climbed 270%. 

While the GoPro Network is a great way to build brand awareness, it doesn't make sense as a full business expansion. Since GoPro is relying heavily on other social networks and platforms to grow the network, it has to split ad revenue with those partners. YouTube, for example, takes an average cut of 45% from its partners.

The only way for the GoPro Network to become a stable pillar of growth is for the company to launch its own dedicated video site. But the high costs of hosting millions of videos could easily offset any revenue gained from ads.

The Foolish takeaway
When we look at GoPro's cheaper competition, its lack of larger contract manufacturing partnerships, and its misguided belief that online video channels will become a meaningful source of revenue, we can see how hard it can be to justify the stock's forward P/E of 50 and price-to-book ratio of 83.

That's not to say that GoPro won't ever become a great growth stock, but investors should have realistic expectations about the challenges that it could soon face before diving in.

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!


Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers