GoPro Inc (NASDAQ:GPRO) recently cut prices on its lineup of cameras just before the end of an all-important holiday season. The move isn't entirely surprising given the discounts we've become accustomed to in recent years, but the market doesn't seem to know quite what to think of the price cuts

Is GoPro trying to top off a great quarter, executing a strategy of cutting prices after the initial wave of enthusiasts paid full price for Hero5 and Hero6 cameras? Or is there extra inventory sitting on shelves around the world, a problem that crushed the stock two years ago? From the outside, the move could be seen both ways. 

GoPro's lineup of cameras.

Image source: GoPro.

The bullish case for GoPro's price cut

When GoPro unveiled the Hero6 in September, it changed its former launch strategy and only released a single camera, which came with a premium price tag of $499. Older Hero5 models didn't see their prices cut from $399 (for the Hero5) and $299 (for the Hero5 Session) -- it just sat on top of the existing product line.

The pricing move could have been in anticipation of cutting prices as the holidays wore on and channels filled with inventory. The new pricing of $449.99 for the Hero6 Black, $299.99 for the Hero5 Black, and $199.99 for the Hero5 Session is really more in line with where prices stood for GoPro cameras a year ago, and presents a much more compelling lineup for customers than before the price cut. If the strategy was to wait until just before the holidays ended to reduce prices it could be a nice way to goose sales in December. 

The bearish case against GoPro's price cut

The downside argument is that GoPro built too many cameras and is now discounting them to move them through the sales channel. GoPro has a history that indicates this is possible, discounting and writing down cameras during and after the 2015 holiday season.

One data point in favor of the bearish case is management's guidance of $460 million to $480 million in revenue, down from $541 million of revenue in Q4 2016. If management gave weak guidance because it was already seeing weak demand and felt the need to cut prices, this may be evidence of a weaker than expected quarter. 

Why investors shouldn't be too worried

Heading into the launch of Hero6, Nick Woodman said GoPro would be intentionally undersupplying the market in an effort to reduce inventory risk. The new strategy of extending a camera's life to at least two years also means GoPro has a much longer period of time to sell cameras. Overbuilding Hero6 Black, for example, won't require discounting in December because it'll likely be in the lineup well into 2019. 

What investors will want to watch in the fourth quarter earnings release are revenue and gross margin. If revenue beats guidance it would be great, but gross margin would really tell us if the company had to reduce prices earlier than expected or if this was the plan all along. 

Right now, I think the evidence points to GoPro executing a planned price reduction, but earnings results will tell if that thesis is true. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.