GoPro's stock (GPRO +5.26%) recently tumbled after the action camera maker cut its full-year revenue guidance from 9%-12% growth to just 6%-9% growth. It blamed the reduction on a production delay, which will shift the shipments of its new Hero 8 Black cameras from the third quarter to the fourth quarter.
GoPro also expects the delay to reduce the midpoint of its adjusted gross margin for the second half of 2019 from 37.5% to 36.5%. As a result, it slashed its full-year adjusted EPS forecast from $0.40 to $0.30-$0.35, which is still better than its loss of $0.23 per share in 2018.
Simply put, any investors who hoped that GoPro's new Hero 8 and 360-degree Hero MAX cameras would pull its stock out of the gutter were sorely disappointed. Let's take a look at how GoPro dropped the ball again -- and why it might be time for investors to cut their losses.
Image source: GoPro.
Killing its top camera while delaying its successor
GoPro's stock has lost over 90% of its value over the past five years for four reasons:
- Its upgrade cycles were too long (especially after the Hero 4 in 2014)
- Cheaper competitors entered the market
- Smartphone cameras improved
- The company failed to expand beyond its niche market of outdoor enthusiasts
GoPro tried to counter those headwinds by launching cheaper cameras (which simply cannibalized its higher-end devices) and a drone (which was quickly crushed by market leader DJI Innovations). As a result, GoPro's revenue growth hit a brick wall and its margins crumbled.
|
Fiscal year |
2014 |
2015 |
2016 |
2017 |
2018 |
|---|---|---|---|---|---|
|
YOY revenue growth |
75% |
16% |
(27%) |
0% |
(3%) |
|
Adjusted gross margin |
45.1% |
41.7% |
39.3% |
33.3% |
32.8% |
YOY = Year-over-year. Source: GoPro annual reports.
However, GoPro's revenue grew 10% annually in the first half of 2019, and its adjusted gross margin expanded to 34.2% in the first quarter and 35.8% in the second quarter. The main reason was that the Hero 7 Black, which records 4K videos at up to 60fps, finally convinced some users to upgrade their aging cameras.
GoPro, encouraged by the Hero 7's success, likely wanted to avoid the mistakes it made in 2015 when it didn't follow up the popular Hero 4 with a new flagship device. Instead, it launched two cheaper cameras before launching the Hero 5 in late 2016.
Unfortunately, GoPro's cheaper cameras cannibalized sales of the Hero 4, reduced the brand's pricing power, and made it tougher for the Hero 5 to win over consumers. As a result, GoPro discontinued most of its cheaper cameras and resumed annual launches of its flagship devices.
But, as I recently pointed out, strong sales of the Hero 7 in the first half of 2019 didn't signal the start of a new heyday for GoPro. Instead, they indicated that users of much older cameras, like the Hero 4, finally upgraded their devices. Therefore, GoPro should have given the Hero 7 more room to run before announcing the Hero 8.
Image source: GoPro.
Instead, GoPro prematurely killed the Hero 7's momentum by announcing the Hero 8, since high-end users don't want to buy an outdated camera. Then it dropped the ball again with a production delay, which pushes the camera's on-shelf availability into late October -- compared to September launches for its previous four flagship cameras.
The production delay also raises a red flag
GoPro has struggled with production delays before, but rarely with its flagship devices. This raises questions regarding GoPro's decision to replace Ambarella's industry-standard image processing system-on-a-chip components with in-house chips (designed by Japanese chipmaker Socionext) in 2017.
GoPro's divorce from Ambarella reduced its production costs, but its decision to rely on in-house chips could be causing hiccups in its supply chain. GoPro also has a spotty history of relying on smaller contract manufacturers, like Taiwan's Chicony Electronics, instead of more reliable giants like Foxconn, which was once a major GoPro investor.
The problem isn't GoPro's product, it's the upgrade cycle
It's easy to blame GoPro's management for its latest problems, but the real issue is the painfully long upgrade cycle for action cameras. People don't generally buy new GoPro cameras unless their old ones break or significant new features are added.
The Hero 8's most significant improvements over the Hero 7 include an upgraded version of the HyperSmooth stabilization feature, a built-in mount, and prongs to connect more accessories. The maximum resolution and frame rate remain the same, though, which doesn't make it a compelling upgrade for Hero 7 owners.
Therefore, investors should consider GoPro a cyclical stock -- 2014 and 2018 were its post-IPO peaks, and it's heading toward another trough as users stick with their old cameras or focus on cheaper devices or new smartphones instead. Investors should focus on that decline instead of GoPro's latest guidance cut, and realize that things could get much worse over the next few quarters.
