It might not explode, but it can definitely crash and burn.
Action-camera maker turned aspiring drone maker GoPro (NASDAQ:GPRO) has announced that it is recalling its $800 Karma drone, its first drone that the company was hoping would turn around its fortunes. Since Karma launched just a few weeks ago, the good news is that GoPro hasn't sold that many units. There are only 2,500 units being affected by the recall, which represents all of the drones that GoPro has sold since the product's launch on Oct. 23. The reason for the recall is that some of the units were losing power "during operation." The last thing GoPro wants is for a Karma with spinning blades fall out of the sky. GoPro says there have been no reported injuries or property damage.
For now, GoPro is offering full refunds but no replacements. The company is waiting until it can actually figure out the problem before offering replacement units, presumably taking lessons from Samsung's botched recall of its Galaxy Note 7, which was implemented before the South Korean conglomerate even knew what was wrong with the phones (Samsung still hasn't figured out the underlying problem).
The good news
Fortunately for consumers and investors alike, GoPro is acting swiftly to remove an unsafe product from the market. That's always the top priority in these situations. By moving quickly, GoPro is also able to minimize logistics expenses associated with the recall, since we're only talking about 2,500 units. That's a pretty modest volume of recalled units to manage, particularly compared to the millions of phones that Samsung has had to deal with.
The swift reaction also helps build consumer confidence in GoPro, as the company is owning a mistake and promising to rectify it, even before it has replacement units ready.
The bad news
GoPro is in full turnaround mode, particularly after releasing disastrous third-quarter earnings last week, and a lot of the negative reaction was related to the company's guidance for the fourth quarter. Revenue in the fourth quarter is expected to be around $625 million, give or take $25 million, which was a bit light relative to expectations. Sales had fallen 40% in the third quarter, and the company needs a strong holiday quarter to renew investor confidence.
Recalls never inspire confidence, but the real question will be how quickly GoPro can determine and address the underlying problem in order to get Karma back on the market. It's not clear if any of GoPro's existing inventory is affected, but presumably it is. Like other consumer electronics companies, GoPro typically builds up inventory in anticipation of the holiday shopping season. Inventory at the end of September was $145 million, up modestly on a sequential basis.
Perhaps the bigger threat is DJI's new Mavic Pro, which looks like strong competition.
Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. 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.