GoPro (NASDAQ:GPRO) unveiled several new products this week, including their new Karma drone.
In this episode of Industry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and Sarah Priestley talk about GoPro's release -- what improvements they've made to their products, how the price points might affect consumer response, and where the stock is today from an investor's point of view.
Then, the hosts dive into the potential future of drone adoption in the commercial sector. Find out how huge this market could be, and some giant obstacles that e-commerce companies like Amazon (NASDAQ:AMZN) and retailers like Wal-Mart (NYSE:WMT) are going to have to solve before drone delivery can really take off.
A full transcript follows the video.
This podcast was recorded on Sep. 20, 2016.
Vincent Shen: Hey, Fools! Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It is Tuesday, Sept. 20, and I'm your host Vincent Shen, joined here in studio by Sarah Priestley to bring you the latest news and insights from the consumer retail sector. Jumping right into it: Yesterday, GoPro unveiled several new products, including what are considered to be some of its most important releases since the original GoPro 35mm Hero and GoPro Digital Hero a decade ago. Those new products included the Hero5 Black, the Hero5 Session, and of course, what everyone has been waiting for since the delay in the first half of 2016, the Karma drone, which will introduce quite nicely our main discussion for this episode, which is drones. What kind of experience do you have with drones, Sarah?
Sarah Priestley: We have ...
Shen: Who is "we?"
Priestley: My husband and I. (laughs) My husband was given by my father a drone for Christmas. And we have, I'm ashamed to say, only used it to make insulting home videos with Star Wars background music.
Shen: Very nice. Do you know specifically which drone it is?
Priestley: That we have? I think it's a DJI.
Shen: In terms of usability, are you impressed with how far the technology has come along? In the consumer space, at least.
Priestley: Yeah, I'm incredibly impressed. I think they've come on in leaps and bounds in a very short period of time. It's incredibly stable and easy to fly. I would say my issue with it is probably battery life, which is the same as what a lot of people seem to have. And I know people are talking about the GoPro, it has an 18 minute battery life?
Shen: Yeah, about 18 to 20 minutes. The Hero5 cameras, there's some really interesting upgrades and improvements from the prior generation cameras. They have voice control now, GPS tagging and more. The Karma is what really caught our attention, especially since we're focusing on drones for this episode. It's been priced at about $799 as the stand-alone device, $999 or $1099 paired with one of the new Hero5 cameras as a package.
Based on research and speaking with some of my friends who are into drones as a hobby, some of the key factors that people generally consider when they buy a drone for consumer use are battery life (like you mentioned), form factor, range, how far it can fly out, the camera system it uses, if you want to have a camera on it, and, of course, the budget. How the Karma fares with these criteria, in terms of battery life, we mentioned 18 to 20 minutes, it's actually pretty standard and competitive with rival offerings. Other makers like Parrot, DJI, the current battery technology, even just a half hour flight time is actually considered to be industry-leading for consumer drones.
And then the form factor -- where I thought the Karma really stood out, it was actually on stage with the CEO for his entire presentation in a backpack. When he pulled it out, it was kind of a surprise, because of the fact that it's so compact. Basically, arms fold in for storage; otherwise, when they fold out, it looks like the standard quadcopter. But it's very easy to snap open and deploy. The whole package with the camera, the mount, the remote controller, and the stabilizing gimbal -- if I'm pronouncing that correctly -- it weighs not much more than five pounds, and the remote has a five-inch screen with controls that really resemble, in my opinion, your basic handheld gaming device, kind of like with joysticks, which I think a lot of everyday users would be able to pick up and learn relatively quickly compared to some of the other drone remotes that I've seen that are how much more complicated, and resemble things like a more complex RC device.
In terms of range, it can fly up to 1 kilometer -- over 3000 feet from the user, which is pretty impressive. 35 miles per hour flight speed, and a maximum altitude of 14,500 feet for flight. The camera system is obviously compatible with the Hero5 series, also the Hero4. When it's paired with the stabilization accessories, it makes for a really smooth, professional-looking video, as can be seen in some of the marketing footage, which I highly recommend you check out. I'm sure once it is released in October, there will be tons of user footage out there to show how good it is compared to the competition.
But overall, I think the Karma is pretty well-suited to the action-sport lifestyle and activities where GoPro has established its roots. If you take a minute and look at some of the media headlines about the Karma release, first impressions seem really good. Even in drone hobbyist communities and forums, people seem to be really impressed. These new products are due officially in October. It's perfect timing for the holiday season. That's usually the company's biggest selling period. In 2014, for example, the company was still delivering really strong double-digit growth, and that fourth-quarter holiday season made up nearly half of total sales in 2014.
Right now, it's a much different world for GoPro and shareholders. A lot of new, low-price competing action cameras have eroded the company's market share, taking a toll on the company's results for the past three quarters. So, including the holiday quarter of 2015 and the first half of 2016, the company reported year-over-year revenue declines of anywhere from 30% to 50%. The stock itself peaked back in October 2014, when it hit nearly $90 per share, bounced around until August 2015 at about $60 per share. Now it's endured a pretty steady decline; it's trading at $15. Honestly, with that decline, its valuation multiples have come down from the clouds into much more reasonable territory. It's trading at about 20 times trailing earnings. Previously, it was 70 times or more.
But, when it comes down to it, it's a $799 device, or $1,000 or more if you need a camera to go with it. I'm not sure this is something that can necessarily sell in enough volume to really help GoPro return to its previous growth levels. What do you think? Is that something that people are willing to spend? If you think about another really popular electronics item that's higher end, more expensive during the holidays, for example, gaming consoles like the Xbox and PlayStation, even when they first come out, they're $400 to $500 for a package. This is even beyond that. Maybe certain computers, the newest MacBook, might rival this in terms of price range. But, what do you think?
Priestley: I think if you are serious hobbyist, and you're really into drones -- in fact, if you're really into action photography -- this would probably be something you would do. There's a lot of people who have side gigs, like they're doing wedding photography -- our man behind the glass today is actually supporting his cousin, doing some videoing for her wedding this weekend. I was at a wedding a couple weeks ago, and they had a drone just hovering above the ceremony the whole time. That's a very easy, if you think about it, low-priced option that a lot of people can add to their packages. It's not necessarily just amateurs, I think.
Shen: Yeah, sure. With all that in mind, I think I will leave listeners to stew on this question, and ultimately, wait to see how successful the Karma sells -- how many it's able to sell, and if it has that significant an impact on GoPro's results.
But, a little bit of additional color for you to consider is that ABI Research estimates that the consumer drone market will grow from the 5 million units shipped in 2014 to about 90 million by 2025, or about $4.6 billion in sales. So, there is a lot of opportunity, I think -- a runway for growth for GoPro to establish itself in what is ultimately still a very much developing niche market. If anything, the company definitely has a ton of history taking a pretty specialized product and turning it into a mainstream success. They've sold millions upon millions of action cameras, and at some points, they boasted 80% to 90% market share in that segment -- so, dominant.
GoPro is not quite an early mover in the drone industry, as it was with action cameras. For a long time, when consumers thought of action cameras, they thought of GoPro. And though the price tag makes me a little skeptical, the company does have the option of expanding its price points, just as it did with cameras. The Sessions come in at cheaper levels, at lower price levels. GoPro can do the exact same thing with different models of drones in the future. And I think, when it comes to drones, bigger picture, away from GoPro, our discussions have really been focused on the amateur hobbyist market. Even the professional consumer market. But, in actuality, that's really just a small piece of the opportunities in the drone market overall. Over the summer, back in June, the Federal Aviation Administration issued its official rules for commercial drones, which really opened the door to their use in a lot of industries. Those rules went into effect late last month. And honestly, the commercial drone market is going to dwarf the consumer drone market.
Laying a little bit of foundation in terms of how these commercial drones are coming into play initially, can you tell us a little bit about the framework for the rules, and how that's impacting their use?
Priestley: Yeah, absolutely. I think it's important for people to know that prior to this period, it was illegal to use commercial drones unless you had a section 333 exemption from the FAA. This is actually the second time that they have been asked to come up with these rules and regulations. They were asked in 2012 and they missed the deadline. So it's been something that's on Congress' mind for a while, foreseeing this activity.
But, as you said, the new rules came out in August 2016. I'll just read you a brief excerpt from the press release: "The FAA has finalized new operational rules for routine commercial use of small, unmanned aircraft systems, opening pathways toward fully integrating UAS into the nation's airspace." It's quite a bold claim, and I think these are almost baby steps. Right now, pilots have to keep drones within line-of-sight, which reduces a lot of opportunities in terms of delivery, especially, for retail like we're looking at with Amazon Air and things like that. But, at the same time, it's a big step forward. The same press release suggested that it could add $82 billion to the U.S. economy and create 100,000 new jobs in the next 10 years. It seems like a baby step, but it's a step in the right direction.
Shen: I think it's really important to note that number you just mentioned, $82 billion. That's huge. The commercial drone usage, the number I had for 2025, almost 10 years from now, on the consumer side, is only $5 billion. Again, a really big difference in terms of the size of the market. I think, not just for GoPro, but also some of the other players right now that are trying to establish themselves in the drone market, mostly private companies like Parrot, DJI Innovations, they're going to be fighting pretty hard for a piece of that very sizable market.
A few other rules, specifically, that I thought were kind of interesting in terms of commercial drone usage: They obviously regulate proximity to airports, their flight speed, their flight altitude. But the one you touched on in terms of it having to be within line-of-sight, really affects something that has been a huge trend for e-commerce, which is the impact of delivery, and you mentioned Amazon Air, and the fact that a lot of e-commerce retailers are challenging the traditional retailers, and challenging consumers to think that maybe "It's easier for me to order something, essentially, from the comfort of my couch than it is to make the drive 10 minutes, 15 minutes, or even farther for some people, as we'll get to, to go to the store to buy something.
Priestley: Yeah, absolutely. And I think it's, for a long time, been the preserve of sci-fi movies, but now it's starting to become a reality. I don't know how quickly it will actually happen for consumers. But if you look, in 2015, just business-to-consumer -- so, excluding business-to-business -- the online retail market was $808 billion. There is a huge amount of consumer expectation over how quickly they're going to receive those packages. I think that's, essentially, created a huge pressure point, and a competitive pressure point, for retailers and how they're competing over free delivery -- which obviously is not free for them -- and immediate delivery, which is what we're talking about now.
Shen: Sure. When you look at, what I consider to be one of the biggest examples, it's the biggest example of a traditional retailer, like Wal-Mart, it's obviously been focused a lot in terms of its e-commerce efforts. We've talked previously on this show about it's Jet.com acquisition and other efforts. I think for the most recent quarter, it's been able to return to more robust levels of growth for its e-commerce efforts. And they are really pushing their shipping option. They have their Shipping Pass package, now, I think it's $50 per year, comparable to Amazon Prime.
Something I thought was really interesting is, Piper Jaffray research analysts estimates that Amazon has successfully built out its network of fulfillment centers at this point to be within 20 miles of 44% of the U.S. population. Back in 2010, that penetration level was just 5%. On the other hand, we know that Wal-Mart has a ton of stores. What's their penetration level?
Priestley: They have a store within 5 miles of 70% of the population.
Shen: So, what do you see in terms of shipping, the drone opportunities, how do you see that playing out? Because Amazon, obviously, with about 44% penetration within 20 miles, that seems, potentially, in the future, as the technology develops, as the flight times improve, for them to be able to really deliver and expand what is right now a limited 40 markets for Prime now, essentially, your delivery within 1 or 2 hours. What do you think?
Priestley: I think there's a lot of hurdles for them to overcome, not just regulatory. I think it's going to be a societal change, too. How much do you really need to get it within 30 minutes? And, obviously, price will affect that. But, as you said, Wal-Mart's distribution of the retail locations is a huge advantage. I don't think people realize, when you talk about drones, the idea is that it will essentially be a single-package short delivery. Then, this opens up a whole secondary question over how cost-effective is this actually going to be? A lot of people have made the argument that this could be, in fact, cents per mile. The last mile of the delivery is where the opportunity is for retailers. I think the last mile adds 28% of the cost of delivery. So, if you just take this last mile and think about how much cost benefit there is going to be for a drone. And there are some analysts that are pegging this out to be ridiculously cheap, $0.88 for the final delivery. Some of them are pegging it to be $10 to $17 per delivery, depending on what you factor in. So, there's a whole host of issues. There's a whole timeline when we need to find out what the price point is for people; if they actually want this, how much they're willing to pay for it. Deloitte surveyed last year 4,000 shoppers around the holiday season, and a quarter of them were unwilling to pay for next-day delivery. You can see that expectations are rocket-high from consumers already from what they're expecting.
Shen: If you're online and you're not competing on price, you're competing on getting that package to the person as quickly as possible. That's, ultimately, one of the big challenges with shopping online. You have to wait for it, and you can't handle it in person. That has driven consumers to have this expectation where, "Hey, I want that, and I want it shipped to me quickly for free." Amazon has certainly contributed, partially, to that. But that has also been a huge competitive advantage for them.
Focusing in on what you mentioned, that last mile of delivery. There was an article in The Wall Street Journal that was really interesting, basically about how it's affecting the United States, a very big country, a lot of people live in more rural areas. With last-mile delivery, for the logistics companies like UPS or FedEx, they benefit most when their truck can drive along a street, maybe a five-mile stretch, for example, and deliver a ton of packages, hundreds of packages in their route. It's the most cost-effective for them. Whereas, in some cases, in more rural area, population densities are much, much lower, it's the complete opposite.
Priestley: Yeah, absolutely. This is called route density and drop size -- the two criteria here. So, either you do your normal route, and you deliver a lot of packages, or you do a smaller route to, say, one place, and you deliver a lot of packages. That's the way they work out the economics of this. The issue, as you alluded to, is the fact that the rural economy in the U.S. is really picking up online. I think 68% of people were online shopping in rural areas last year. That's grown to 75% this year. This poses a challenge to retailers in the fact that they offer a standard delivery price whether you live in Manhattan or you live Arkansas. The reason that they do this is because they have to be completely transparent, and they have to be open. They can't seem to be penalizing people for where they live. But there is an additional cost for doing this, and it's around $4. If you look at USPS or even the more premium FedEx and UPS, they're charging upwards of about $4 for very rural deliveries. And the retailer is absorbing these costs. That's going to have a direct impact on margins eventually, if this continues to increase. At the moment, it's probably just a small fraction of the overall revenue source for them.
Shen: Yeah. To put some of that into context, too: Right now, online purchases for all consumer spending is still in the single digits, like 9%, almost 10%. So, there's really a ton of opportunity for online shopping, especially among rural consumers, to grow. That Wall Street Journal article had some really interesting examples where, basically, they mentioned, it's not just people shopping for a big ticket-item like a PC, or something you would buy online. It's really some of their daily staples, including paper towels and other things you need every day in your home. Another example of how long some of these mail routes get: There was one carrier, his daily mail loop is almost 190 miles in Oklahoma. That's the kind of challenge we have. Potentially, if the cost structure and the other logistics to regulations work out, drones can help alleviate that. Right now, a lot of the technology is limited. You can only carry one package, for example. But I would assume they're working on that.
What other limitations do you think -- it seems like a really great idea in a city, getting things out really quickly, less than 30 minutes. What aren't we thinking of?
Priestley: There are a whole host of issues, especially in cities. The people that are working on this, they call this the last 50 feet issue. So, not only do you have problems with human interference -- we're naturally inquisitive people, and there' the suggestion that maybe they could be taken, stolen ...
Shen: They could just swat a drone like a fly.
Priestley: Exactly. You get children, animals, all those kinds of interferences that can occur. And also, you have logistical issues. Last year, in November, Amazon released a YouTube video basically showing a woman who needed football cleats, and she ordered them, and it showed you the dispatch, and it going all the way there. She put a little pad outside on her yard, and that's where the drone landed. We don't know if that's actually what's going to happen, but there needs to be some kind of identifying factor of where this is going to land. And if you live, like we do, in an apartment complex, where does the drone deliver? Is it going to be on the roof? How safe is that? There's a whole host of issues.
Shen: It's funny, we talked about last mile delivery, when we're talking about a truck. Now it's the last 50 feet when we're talking about drones. Anything else, in terms of what you see as possibly being a holdup in terms of adoption in the specific consumer retail application?
Priestley: Yeah, I think there's also going to be big argument that, how necessary is this? You have, now, Walgreens and CVS, who have a huge store footprint. They're stocking a lot of the things that formerly, you would have to make an emergency run to the supermarket for. It seems this is going to be much more niche than people are expecting, to me. I think it has much more application with things like oil rigs, parts for when big oil rigs stop pumping, and medical applications. And I think this is where a lot of other people project this to go, too.
Shen: Let's focus in on that. What examples have we seen, or, are there good examples out there that you've seen of drones working really well? People have talked about, beyond the consumer retail space, also agriculture, defense, energy, medicine. Do you have examples?
Priestley: Yeah, absolutely. There's a start-up -- I guess they're not start-up anymore, they were established in 2011 called Matternet, and they deliver medical supplies. They operate in Switzerland, Haiti, the Dominican Republic right now. And I'll take one example from them. In Maseru, the capital of Lesotho, which is in Southern Africa, one in four adults has HIV. Matternet's drones deliver blood samples to clinics, they deliver medicine, and they already operate in a network 1.5 times the size of Manhattan. So, it really does show you the opportunity there. But I think the biggest reason this is used is that the paved roads are scarce, and the drone network is cheaper than establishing a road network. I think the delivery cost is about $0.24 per delivery on what they operate now.
Shen: Oh, wow. So, I think, overall, bringing this back into the Foolish world, in terms of investing, with the drone players themselves, GoPro is really making a splash with its Karma, that we spoke about earlier. But a lot of the other companies right now are definitely small, private, a little harder to make that direct investment, if you're interested in getting an investing foothold here. But we talked about some of the retailers, as well. Amazon -- for years now, Jeff Bezos has talked about, for years, his interest in turning this into a viable way of expanding its delivery options and its efficiency, for example. But otherwise, I'd love, in future shows, to tackle some of the different companies that might be supplying some components and things along those lines -- as much as we can in the consumer retail space -- for these drones. Any other takeaways for you, that you were surprised by, or anything in terms of the future for this industry right now?
Priestley: Yeah, I will say, if you're an investor right now in Amazon or Wal-Mart, the things you're probably going to be seeing are the building out of more click-and-collect kind of offerings, more distribution centers, shipping from store. And I wouldn't be surprised to see that in the earnings calls. This is going to potentially offer a huge benefit. If you look right now in the U.K., the retailers are losing about 300 million pounds a year because they can't find the right price point for delivery, and consumers are so sensitive to it. I think this is really a good debate to have.
Shen: OK. Thanks a lot. With that, that's the time we have today, but you can continue the conversation with us and the rest of the Industry Focus crew via Twitter @MFIndustryFocus, or send us any questions or comments via email at firstname.lastname@example.org. People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thanks for listening and Fool on!
Sarah Priestley has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, FedEx, and GoPro. The Motley Fool recommends CVS Health and United Parcel Service. 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.