Shares of GoPro (GPRO -1.49%) jumped 13% on July 11, presumably on news that Nintendo's popular Pokémon Go augmented reality game would spark interest in the AR/VR market. That conclusion didn't make any sense, since GoPro's 360-degree VR rigs have absolutely nothing to do with the depth-sensing cameras which are used for advanced AR applications.
I believe that confusion about the AR/VR market, combined with the fact that GoPro's short interest was at a five-month high, sparked a temporary short squeeze instead of a sustainable rally. Instead of chasing the stock at current prices, I think GoPro investors should consider selling the stock for four simple reasons.
1. Where's the growth?
Analysts expect GoPro's sales to fall 17% this year, down from 16% growth in 2015 and 41% growth in 2014. GoPro forecasts a 6% to 19% decline, depending on how well the Hero 5 and Karma drone sell during its holiday quarter. But to hit that range, GoPro needs the two devices to boost its fourth quarter revenue by 37% to 83% annually -- which would be comparable to its sales growth in the fourth quarter of 2014, when it started selling its Hero 4 Black cameras.
Unfortunately, the market has changed dramatically since the Hero 4 devices were launched. Competitors in action cameras and drones have flooded the market, and price expectations have plunged. GoPro's non-GAAP operating margins fell 340 basis points year-over-year to 41.7% in 2015, then declined 1,220 basis points to 33% during the first quarter. As a result, GoPro is no longer profitable on a GAAP or non-GAAP basis, and analysts expect it to remain deep in the red for at least the next two years.
2. The Hero 5 and Karma will probably flop
GoPro has revealed nearly nothing about the Hero 5 and the Karma, but both devices must offer jaw-dropping features at competitive prices to win back consumers. Yi Technology recently released the Yi 4K Action Camera 2, which uses the same Ambarella (AMBA 6.41%) SoC as the Hero 4 Black but adds a bigger battery and an LCD screen for half the price at $250. Xiaomi just introduced a 4K drone which costs about $450 -- $50 less than the Hero 4 Black.
GoPro reportedly plans to sell the drone as an accessory for its cameras -- indicating that the combination of a Karma and a GoPro camera could be pricier than stand-alone drones. Unless GoPro rethinks that pricing strategy, it could be in for a rude awakening this holiday season.
3. Fool me once, shame on you
When GoPro went public, it claimed that it could evolve into a media company. Last year, CEO Nick Woodman declared that GoPro was developing a cloud-based platform for its photos and videos. In late 2015, GoPro announced that the Karma would arrive in the first half of 2016. At CES in January, Woodman said that GoPro would launch a cheaper stand-alone spherical camera in the near future. None of those promises have been fulfilled yet.
GoPro has been trying to tap into the hype regarding VR devices by touting its Jump partnership with Alphabet's (GOOG 5.20%) (GOOGL 5.11%) Google, which delivers content from a 16-camera rig to YouTube. Unfortunately, Google recently signed a similar partnership with GoPro's rival Yi Technology, indicating that the partnership isn't an exclusive one.
GoPro's strategy since its IPO seems to be simply following hot trends. Its VR rigs were just copies of similar products from third party companies. The Karma was a response to drone leader DJI installing its own cameras instead of GoPro mounts. The talk of spherical cameras was a response to cheaper VR cameras like Kodak's PixPro SP360 4K. A recently revealed patent seemingly indicates that GoPro simply acqui-hired the developer of an interesting drone design to "create" the Karma.
4. Discontinuing important cameras
Last year, GoPro expanded its camera line to six cameras to reach more mainstream consumers. After the Session flopped and its price was cut in half, GoPro shifted gears earlier this year and reduced the line to just three cameras -- the Hero 4 Session, Hero 4 Silver, and Hero 4 Black.
But considering that the discontinued low-end to mid-range cameras (Hero, Hero+, Hero+ LCD) accounted for nearly a third of GoPro's sell-through last quarter, it was a huge risk to abruptly discontinue those cameras. GoPro seems to think that potential customers will shift toward its other three cameras (thus boosting margins) but that strategy ignores the fact that there are plenty of cheaper devices on the market.
Further, GoPro's own employees don't seem confident in the company's scattergun plans for VR, drones and new action cams. Over the past six months, insiders sold 2.8 million shares but didn't buy a single share on the open market.
Is it time to let go of GoPro?
Shares of GoPro have fallen nearly 80% over the past 12 months, but I don't think that its decline will end anytime soon. The stock might look cheap with an EV/Sales ratio of 0.9, but it will take just a few more quarters of declining sales to cause that multiple to rise. Therefore, it might be wise to reevaluate GoPro's growth opportunities and sell the stock on any other unjustified rallies.