GoPro (GPRO 1.56%) 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 0.77%) 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 1.68%) and Instagram, a subsidiary of Facebook (META 0.95%). 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.