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GoPro Inc: Bulls Need a Reality Check

By Leo Sun - Apr 5, 2017 at 6:35PM

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If you think GoPro is too cheap to ignore, it’s time for a reality check.

In less than three years, GoPro (GPRO -0.45%) went from being one of the hottest stocks on Wall Street to being one of the most hated. GoPro surged from its IPO price of $24 to nearly $90 in late 2014, but plummeted to the single digits as demand for its action cameras cooled. Many investors clearly believe that further downside is ahead, with 32% of shares still being shorted as of March 24.

But whenever a stock falls so much, contrarian bulls emerge. GoPro rallied strongly last month after it announced a third round of layoffs. Citi analysts subsequently upgraded the stock from Sell to Neutral, noting that its revenue growth would likely stabilize, it would reach its non-GAAP profitability targets, and that it probably wouldn't need to access its credit facility to stay afloat. That upgrade likely convinced some bulls that the stock was finally bottoming.

GoPro's Karma drone.

GoPro's Karma drone. Image source: GoPro.

But here's my message to those hopeful investors: it's time for a reality check. GoPro's track record of broken promises and its lack of compelling new products indicate that the bears are probably still right about this beaten-down stock.

Why GoPro crashed in the first place

GoPro's crash is often attributed to competition in the action camera market, the overall saturation of that market, and the longevity of existing devices making upgrades unnecessary for most users. Meanwhile, improving smartphone cameras made carrying around a separate action camera -- especially one that cost as much as a mid-range phone -- seem pointless for mainstream users.

However, GoPro's decline was also exacerbated by blatant exaggerations. When GoPro went public, it declared that it could become a "media company," but those plans collapsed last year and it laid off most of the division, which included costly hires from other tech and media companies. GoPro also repeatedly promoted virtual reality as its next growth market, even though the only VR products it offered were two expensive multi-camera rigs (the $5,000 Omni and $15,000 Odyssey) which cost thousands of dollars.

GoPro's Odyssey (L) and Omni (R) VR rigs.

GoPro's Odyssey (L) and Omni (R) VR rigs. Image source: GoPro.

Those devices were so expensive that Alphabet's (GOOG -1.29%) (GOOGL -1.34%) Google -- which co-developed the Odyssey with GoPro -- opened up YouTube's VR/360 channels to cheaper camera makers like Yi Technology, Ricoh, and 360fly. GoPro responded to that move by launching its own VR app and site, GoPro VR, but that effort reached far fewer viewers than its YouTube channel. CEO Nick Woodman also vaguely hinted at the development of a stand-alone 360-camera over the past year, but that device probably won't arrive anytime soon.

GoPro's management blunders are also easy to see. The company priced the Hero 4 Session too high in 2015, then took big writedowns by repricing it twice. It wasted nearly $36 million buying back its own shares before they were cut in half. It botched the launch of the Karma drone, its most eagerly anticipated product of 2016, with a humiliating recall. It continues developing all of its new products -- drones, handheld stabilizers, and VR rigs -- as accessories for selling more action cameras, instead of expanding into brand new product categories.

Why the bulls think GoPro can recover

After all those missteps, the bulls basically believe that three rounds of layoffs -- which downsized its media and VR units while reducing its headcount from 1,500 to 930 -- will stabilize GoPro's business and help it achieve non-GAAP profitability again. They probably also believe that GoPro's low EV/sales ratio of 0.8 and its clean balance sheet will limit its downside potential and make it a lucrative buyout target.

Unfortunately, downsizing in the face of rising competition will likely reduce GoPro's brand presence, throttle innovation, and lead to more quality control issues like the Karma disaster. GoPro also hasn't offered any viable solutions to counter the competition in action cameras, drones, or smartphones, and it's been slow to respond to new product categories like stand-alone 360-degree cameras and augmented reality glasses. Wall Street believes that GoPro's revenue will rise 7% this year and 2% to $1.3 billion next year -- but that will still be well below the $1.62 billion in revenue it generated in 2015.

If a bigger company wanted to buy GoPro, which has an enterprise value of less than $1 billion, it also would have likely made a move by now. Yet no serious reports about buyouts ever surfaced, indicating that it's simply cheaper for bigger companies like Garmin to develop in-house action cameras instead of inheriting all of GoPro's problems.

Why a reality check is in order

I owned GoPro stock before, and I once believed in the company's promises of expanding its brand into a media ecosystem and growing in adjacent markets. But then the hard truth set in -- the company was a one-trick pony without a moat, and the management repeatedly failed to launch products on time or even price them correctly. These failures indicate that while layoffs might slow GoPro's decline this year, they won't likely help the stock rebound.

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