GoPro Takes a Wild Ride After Falling Short on Production Issues

GoPro (GPRO -0.56%) released weaker-than-expected third-quarter 2016 results after the close, and the market couldn't seem to decide just how bad it thought the action-camera maker's results were. After promptly falling more than 17% in Friday's early trading, GoPro shares gradually recovered, to trade in positive territory by midday -- only to turn negative again and close down more than 6%.

Let's take a closer look at what drove GoPro's relative underperformance to start the second half of the year.

IMAGE SOURCE: GOPRO, INC.

GoPro's results: The raw numbers

YOY = year over year. Data source: GoPro Inc.

What happened with GoPro this quarter?

• On an adjusted basis, which excludes items like stock-based compensation, GoPro's net loss was $84.3 million, or $0.60 per share, compared to adjusted net income of $36.6 million, or $0.25 per share in last year's third quarter.
• GoPro didn't provide quarterly financial guidance along with last-quarter's report. But for perspective -- and while we don't usually pay close attention to Wall Street's expectations -- analysts' consensus estimates predicted the company would turn in revenue of $314.1 million and an adjusted net loss of $0.35 per share.
• In September, the company introduced the HERO5 Black and HERO5 Session cameras, priced at $399 and $299, respectively. The new cameras were made available at retail stores and at GoPro.com in early October, shortly after the third-quarter's end.
• The company launched GoPro Plus, a $4.99-per-month subscription service that lets users upload, access, and share GoPro content to the cloud.
• The company updated the GoPro Capture and Quik mobile apps, and released the Quik app for desktop.
• GoPro launched the new Karma drone, which became available at retail stores on Oct. 23, 2016. Karma includes the Karma Grip stabilizer, backpack, and game-style controller starting at $799. Karma buyers can add a HERO5 Session to their purchase for an additional $200, or the HERO5 Black for another $300.
• According to data from research firm NPD, GoPro commanded three of the top five best-selling products in the digital camera/camcorder category in Q3. GoPro's HERO4 Silver remained the country's best-selling camera on a unit basis for the eighth-straight quarter, while Session was a close second place for the third-straight quarter.
• NPD data also indicated that GoPro's market share of the combined digital camera/camcorder category rose 80 basis points year over year, to 21.5%.
• According to GfK data, GoPro's digital-imaging unit share also climbed 200 basis points year over year in Europe, to 11%, accounting for four of Europe's top-five camcorders.
• Surpassed 10 million followers on both Facebook and Instagram, with the latter up 65% year over year (including a 390% increase in international followers).
• Social media views of GoPro content in the quarter climbed 30% year over year, to 179 million.

What management had to say

Referring to GoPro's newest products, company founder and CEO Nick Woodman stated:

These are the best products we've ever made and consumer demand is strong. GoPro is now a seamless storytelling experience and we're very happy with customer reception so far. Looking forward to 2017, we expect to return to profitability, driven by the strength of our new products, double-digit revenue growth, and annual operating expenses of approximately $650 million.

During the subsequent conference call, however, Woodman elaborated on the cause of GoPro's lighter-than-expected quarter:

As good as these products are and as impactful as we expect them to be, unfortunately we experienced production issues that resulted in lower-than-expected launch volumes for HERO5 Black and Karma. While our teams worked tirelessly to solve the problems, we expect the situation to have a negative impact on results for the second half of the year. As a consequence of our compromised production ramp, we were unable to fully restock channels, which have been cleared of legacy products during the third quarter. And furthermore, we anticipate difficulty catching up to meet forecasted demand during the fourth quarter.

Looking forward

But even despite those production headwinds, GoPro expects to return to non-GAAP profitability in the current quarter. More specifically, for the fourth quarter, GoPro anticipates revenue in the range of $600 million to $650 million, GAAP earnings per share of $0.10 to $0.20, and adjusted earnings per share of $0.25 to $0.35. Here again, however, this guidance was well below analysts' models, which predicted fourth-quarter revenue of $666.1 million and adjusted earnings of $0.44 per share.

GoPro now expects full-year revenue between $1.25 billion and $1.3 billion, marking a reduction from its previous guidance range for 2016 sales of $1.35 billion to $1.5 billion.

GoPro also revealed it expects to achieve double-digit percentage growth in 2017 from that freshly reduced 2016 range. And while it anticipates that will translate to a GAAP net loss, it should be profitable on an adjusted basis.

On one hand, I suppose it's encouraging that GoPro is enjoying strong demand for its newest products. And suffering from a lack of inventory on production issues is arguably better than enduring a surplus for a product nobody wants. (Remember GoPro's botched launch and too-high pricing of the HERO4 Session camera last year, anyone?)

On the other hand, it's admittedly discouraging that GoPro is unlikely to make the most of this year's lucrative holiday season, incremental profits from which could have served to bolster its R&D and marketing efforts as it strives to return to sustained, profitable growth over the long term. So in the end, it's unsurprising that GoPro stock would take torn investors on such a roller-coaster ride today.