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GoPro's New $200 Hero Could Send the Stock to Zero

By Leo Sun – Apr 2, 2018 at 8:41AM

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This new Hero is a total zero.

GoPro (GPRO -1.76%) recently unveiled a new $200 Hero camera, which the company claims is "as easy to use" as a smartphone. The entry-level device, which joins the $300 Hero 5 Black and $400 Hero 6 Black cameras, has a 2" display and captures 10-megapixel photos and 1080p videos at 60 fps. It can also be voice activated for hands-free recording, and is waterproof in up to 30 feet of water.

The new Hero is technically impressive, but here's the problem: GoPro tried to sell cheaper cameras to the masses before, and the results were disastrous. GoPro's failure to learn from that experience indicates that this new Hero, along with other bad management decisions, could eventually send the stock to zero.

GoPro's new $200 Hero.

Image source: GoPro.

GoPro is reusing a failed strategy

After going public in 2014, GoPro realized that it needed to sell more "mainstream" devices to expand beyond its core market of outdoor enthusiasts. So it launched the Hero 4 Session, an ice-cube sized device initially priced at $400, in 2015. That price tag was too high, and GoPro slashed its price twice to $200 before any buyers appeared.

Thinking that consumers wanted cheaper cameras, GoPro launched three low-end to mid-range devices later that year: the $130 Hero, $200 Hero+, and $300 Hero +LCD. However, these new cameras cannibalized sales of its pricier Hero 4 Silver and Black cameras. Meanwhile, GoPro's core users were disappointed that the company didn't launch new Silver and Black cameras that year.

As a result, GoPro's revenue rose just 16% in 2015, compared to 41% growth in 2014. Its non-GAAP gross margin fell from 45.1% to 41.7%. In early 2016, GoPro discontinued the Hero, Hero+, and Hero+ LCD, then repositioned the $200 Session as its entry-level camera.

What happened afterward

The Hero 5 lineup, which was introduced later that year, consisted of only two cameras: the $400 Hero 5 Black and the $300 Hero 5 Session. Customers weren't impressed, and GoPro's revenue dropped 27% in 2016, its non-GAAP gross margin fell to 39.3%, and it reported a full-year loss.

Last year, GoPro discontinued its short-lived Karma drone and launched two new high-end cameras -- the $500 Hero 6 Black and the $700 Hero Fusion, which captures spherical content for interactive and VR videos. GoPro's sales finally stabilized in 2017 with a 0.5% sales decline, but its non-GAAP margin fell again to 33.3%, and it posted another full-year loss.

GoPro's Fusion.

GoPro's Fusion. Image source: GoPro.

For the current year, Wall Street expects GoPro's revenue to fall 8% and for its bottom line to remain in the red. GoPro simply faces too much competition in its niche market from companies, while mainstream users will likely stick with their phones for capturing photos and videos.

The writing's on the wall

In GoPro's early days, its brand strength gave it the pricing power to sell $500 cameras. However, GoPro's introduction of a new $200 camera, even after witnessing the cannibalization disaster of 2015, indicates that it wants to generate sales growth at any cost.

To offset the inevitable margin declines, GoPro thinks that licensing its lenses and sensors to third-party companies is a good idea. GoPro struck a licensing deal with its longtime manufacturing partner Jabil (JBL -2.29%) in late March which will let Jabil incorporate GoPro-designed lenses and sensors into "GoPro-approved" third-party products.

In theory, that licensing deal could generate some higher-margin revenues, which could offset the declines in its hardware business. However, licensing its prized technology to rivals with more scale, like Samsung (NASDAQOTH: SSNLF), could result in cheaper cameras equipped with GoPro's technology flooding the market.

The key takeaway: Avoid GoPro

GoPro's launch of its new Hero smacks of desperation, and seems like an eleventh-hour effort to grow its revenues with reckless disregard for cannibalization and margins. Its equally reckless decision to license its tech to its competitors could exacerbate the pain by further commoditizing the market.

I'm not saying GoPro will drop to zero anytime soon. But at less than $5 per share, the camera maker needs to make smarter decisions before its remaining investors abandon its sinking ship.

 

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends GoPro. The Motley Fool has a disclosure policy.

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Stocks Mentioned

GoPro, Inc. Stock Quote
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$5.03 (-1.76%) $0.09
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