Please ensure Javascript is enabled for purposes of website accessibility

GoPro Lacks a Competitive Moat

By Will Ebiefung - Feb 5, 2020 at 8:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Competition from smartphones and action-camera rivals may push down margins and suppress top-line growth.

GoPro (GPRO 1.94%) will be reporting fourth-quarter earnings after market close today, and management is making big promises. They expect significant top-line growth to offset weakness earlier in the year. But while GoPro may hit its full-year revenue targets thanks to strong holiday sales and the new Hero 8 camera, its top line isn't growing fast enough to make up for its eroding margins and lack of a competitive moat. 

Camera Lens

Image Source: Getty Images.

What went wrong at GoPro?

At first glance, GoPro's offerings look well-suited to today's culture. Vlogging -- video blogging -- is an important part of online life as and oversharing becomes ever more cool. So what could be better than a small, body-worn camera that records its wearer's every move from a first-person perspective?

It's simple: the smartphone.

Smartphones can do almost everything a GoPro does. And phone camera lenses are becoming more sophisticated, with video quality that rivals the best of GoPro's offerings. Apple's (AAPL 2.14%) iPhone 11, for example, features a 12-megapixel wide-angle lens capable of shooting 4K HD video and slow motion, all of which makes it comparable with the Hero 8's specs.  

Smartphones also are arguably more interactive because they offer users a direct link to web apps, while GoPro cameras have to pair with another device. GoPro's management is working on this, offering smartphone users the GoPro app, which makes sharing content easier, as well as Quick, an application that makes editing easier. 

But smartphone cameras still offer a more seamless way of sharing content -- especially through the most popular photography apps, including Snapchat (SNAP 4.59%) and Instagram, a subsidiary of Facebook (META 1.70%). Competition from smartphones provides constant pressure on GoPro's pricing power and margins, and so far, the company hasn't been able to differentiate itself enough to arrest this threat.

Rival action cameras, such as the DJI Osmo, may also drag down GoPro's margins in the fourth quarter and onward. Both products offer similar specs and a similar price point. Because the two products are so much alike, GoPro may have to lower prices to compete.

Third-quarter disaster

GoPro's third quarter was a debacle. The company posted sales of $131 million, a 54% decline from the prior-year period's $286 million. Gross margins eroded to 22% from 32% year over year. This led to net losses expanding by a staggering 176%, to $75 million from $27 million. 

Management attributed the low sales numbers to the delayed launch of two new cameras: the Hero 8 black and the GoPro MAX. These products were shifted from the third quarter to the fourth quarter.

Nonetheless, management is still guiding for 6% to 9% growth for full-year 2019. Today's earnings might show that they were able to pull it off, with the help of the Hero 8 launch and the crucial holiday season -- but even if they did, it will be a hollow victory. At an optimistic 9% annual growth rate, GoPro's full-year revenue for 2019 will stand at $1.25 billion, compared with $1.15 billion in 2018. This is still below the numbers from 2014 and 2015, which were $1.4 billion and $1.62 billion, respectively. 

Looking forward

Despite its shortcomings, GoPro has an undeniable social cachet that's hard to put a price on. The name "GoPro" has become synonymous with action cameras in general -- much like "Kleenex" became the name for facial tissues. GoPro's social media presence is also massive, with a YouTube channel that grew by 83% year-over-year to record 178 million organic views in the third quarter of 2019. 

That said, while GoPro may well have a place in modern video culture, investors should look elsewhere in the tech space. Given its stagnant revenue coupled with the potential for margin erosion, the company will have a hard time attaining profitability. It also lacks a competitive moat against its smartphone and action-camera rivals.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. William Ebbs has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Facebook. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

GoPro, Inc. Stock Quote
GoPro, Inc.
$6.84 (1.94%) $0.13
Apple Inc. Stock Quote
Apple Inc.
$172.10 (2.14%) $3.61
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$180.50 (1.70%) $3.01
Snap Inc. Stock Quote
Snap Inc.
$11.62 (4.59%) $0.51

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.