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How GoPro, Inc. Makes Most of Its Money

By Demitri Kalogeropoulos – Jun 27, 2017 at 1:00PM

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Why the pressure is on for the struggling camera device specialist to release a new hit this holiday season.

GoPro's (GPRO 1.15%) stock hasn't performed well since its 2014 initial public offering. Product launch problems caused sales to collapse last year, which pulled earnings into deeply negative territory as the company booked a $3-per-share loss, compared to a $0.27-per-share profit in the prior year.

Investors thinking of buying shares today ahead of a dramatic rebound should understand the risks involved in management's plant to return to steady profit growth. So, let's take a look at the camera specialist's major sources of revenue that could help pull it out of its current rut.

Two women take a selfie with  sports camera.

Image source: Getty Images.

New cameras and accessories

Essentially all of GoPro's revenue comes from its sports cameras and the accessories that facilitate their use. Yes, the company just officially entered the drone market (after a bug-filled start). But those sales are insignificant to its business today. Likewise, its GoPro Plus subscription service product hasn't yet accounted for a material portion of revenue.

That makes GoPro a camera company at heart, and one that relies on an unbroken string of new product introductions to keep revenue churning higher. That setup exposes investors to a dizzying range of risks involved in successfully developing and transitioning to a new generation of cameras each year.

To name just a few, GoPro needs to predict the features that consumers will demand and deliver those functions in a high-quality device that's priced competitively. At the same time, its production process has to manage the transition to the new generation so that costs don't spike and inventory levels closely track demand. The company's rollout of the Hero 5 Black camera last year struggled in each of these areas, and the result was collapsing profitability, lower sales, and significant inventory writedowns.

Sold during the holiday season

GoPro's consumer focus makes it subject to massive seasonal swings around the holiday shopping months. In fact, the fourth quarter was responsible for just under half of its entire sales result last year.

Having such hefty exposure to the holiday shopping crush means that GoPro must execute at a high level across its marketing, supply chain, and production processes. If it stumbles instead, even relatively small setbacks can have extremely negative impacts on its operations. Manufacturing issues in the Karma drone, for example, forced that product launch out the critical holiday season quarter last year and likely did serious damage to its brand.

GPRO Revenue (Quarterly YoY Growth) Chart

GPRO Revenue (Quarterly YoY Growth). Data by YCharts.

On the plus side, GoPro's sales distribution channel is one of its most valuable assets. The company does business with 45,000 retailers, but Best Buy is its single largest partner. The electronics retailer was responsible for 17% of revenue last year.

GoPro has a well-diversified selling footprint, with international sales accounting for just over 50% of the business. It also has an aggressive e-commerce presence, primarily through a partnership with Amazon. Direct sales through its website represent less than 10% of annual sales.

Risky times ahead

GoPro's management is working hard to diversify its product line away from just cameras, for example, into services and other devices. The company is also lowering its cost structure, which should provide more financial flexibility as it seeks to expand its sales base.

However, because GoPro gets most of its revenue from a handful of products, and only during a small holiday-focused selling window, the stakes are especially high around the months including and leading up to the Christmas shopping season. That's when the company must convince its network of retailers to stock up on its latest generation of camera devices, mounts, and accessories in hopes that strong customer demand will materialize.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.

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