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Why I Wasn't Impressed With GoPro Inc's Second Quarter

By Travis Hoium - Aug 6, 2018 at 11:31AM

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GoPro didn't prove anything in its second-quarter results.

GoPro Inc (GPRO 1.91%) reported second-quarter earnings and better than expected guidance last week, which helped push the company's shares higher late in the week. Investors seemed to buy into CEO Nick Woodman's projection that the company will be back to profitability in the second half of the year and remain profitable in 2019. 

I've been bullish on GoPro in the past and been burned by that experience, so I take bullish comments from management with a grain of salt. Here's the one thing you should be impressed with in the second quarter -- and why you shouldn't be too impressed with management's rosy outlook. 

GoPro Hero5 Black camera sitting in sand.

Image source: GoPro.

GoPro's truly impressive inventory

Most investors are used to watching earnings numbers like revenue, gross margin, and net income, but for GoPro inventory is a surprisingly important metric. The company's sales are tilted to the holiday season, and if it over-builds inventory it can be susceptible to writedowns. On the flip side, if it under-builds inventory it will lose out on sales. 

In the second quarter, inventory was just $86.1 million, the lowest level since 2014. The second quarter is typically a low inventory quarter in advance of the holiday season build-out, but having low inventory today likely means less discounting of aging models when three new products are released later this year.

Keeping inventory low was truly impressive last quarter, but the rest of the results weren't as impressive as they may initially seem. 

GoPro projections should be seen with a critical eye

What sent shares higher last week was guidance for the third and fourth quarter of 2018. Third-quarter revenue is expected to be $260 million to $280 million with a gross margin of 34%, plus or minus 1 percentage point, and fourth-quarter revenue is expected to be $380 million to $400 million with a gross margin of 40%, plus or minus 1 percentage point. The figures were better than analysts expected, and that's what got investors excited. 

What we shouldn't forget is that GoPro doesn't have a very good track record of predicting future results, especially before new product launches. Last November, it predicted that fourth quarter 2017 revenue would be $470 million, plus or minus $10 million, and gross margin would be 41.5%, plus or minus half a percentage point. When results were tallied just two months later, revenue was $334.8 million and gross margin was 24.8% on a non-GAAP basis (23.8% on a GAAP basis).

We can go back to disappointing holiday results in 2014 and 2015 as well to show how inconsistent GoPro can be. GoPro is going to have to prove it can be a profitable company long-term to regain the market's trust, and even second-quarter results don't do a lot to bolster that position, as you can see below. 

GPRO Gross Profit Margin (TTM) Chart

GPRO Gross Profit Margin (TTM) data by YCharts

GoPro must show that new products can catch on before investors will believe the company is back on track. 

How GoPro can impress investors

What I want to see from GoPro in 2018 is the launch of new products that truly change how the company is perceived by consumers. For years the company has made incremental improvements to its action cameras and watched as competing devices like smartphone cameras and editing software improved by leaps and bounds. If GoPro can capture consumers' imaginations again it could be a valuable company with long-term profitability. Until we see those new products, I'll be skeptical that a turnaround is ahead given how many times the company has burned me, and its other investors, in the past. 

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