Shares of action-camera maker GoPro (GPRO +4.35%) have nearly quadrupled from their 52-week low as investors start to think that a turnaround may finally be here. The company hasn't introduced any awe-inspiring new products, but it's improved operationally and could be profitable in 2020.
Is this another false start for GoPro, or has it finally turned the corner? Let's look at what's been fixed and where the company needs to go to really make a complete rebound.
Image source: GoPro.
Fixing GoPro's flaws
Inventory has long been a problem for GoPro, but recent changes to focus on online sales and reduce retail channel inventory are helping ease that financial pressure. CEO Nick Woodman said on the third-quarter 2020 earnings call:
We're managing inventory much better. You've noticed actually it's down by 50% from a year ago and down sequentially. And we've continued to reduce our channel inventory which is another area of the business we've been focused on. And you'll notice that even in Q4, we expect to reduce channel inventories another 200,000 units and that's more than 800,000 for the year.
Any inventory GoPro has on hand is a risk for a few reasons. First, it costs money to have inventory, so if given the choice, investors would prefer to see cash on the balance sheet rather than inventory. Second, if inventory doesn't eventually sell through, it may have to be discounted by retailers, which hurts gross margin and brand value long-term. Finally, high inventory can mean production is outpacing demand and may eventually result in writedowns of products. This is what happened to GoPro in 2015 and 2016.
You can see below that working capital (or current assets minus current liabilities, which I've used as a proxy for inventory management) has come down dramatically in the last five years, days sales outstanding are down in the past year, and gross margin is stabilizing.
GPRO Working Capital (Quarterly) data by YCharts.
GoPro seems to be managing its business better, and that's a good sign for investors.
Digital sales are going to be stickier
There are a few other reasons to be bullish on GoPro's business. I think the increase in direct-to-consumer sales, particularly through GoPro.com, is a positive long-term. Management said GoPro.com sales were up 37% sequentially to a record $81 million in the third quarter and this was even before the holiday rush.
Subscription sales for GoPro cloud services are picking up steam as well. The company ended the third quarter with 501,000 subscribers, up 35% sequentially and 65% versus a year ago.
Selling directly to consumers and having them sign up for subscriptions creates a more intimate relationship with customers. GoPro can reach them through marketing campaigns and can test what products and messages are working directly, rather than going through a retailer. Long-term, these more direct, digital sales will be good for GoPro.
What's next?
Here's the biggest challenge for GoPro: What's next?
The company has had trouble finding the next big product for its lineup, failing in drones and struggling to gain significant traction for 360-degree videos.
There's no clear answer to what's next for GoPro, and every year smartphone cameras are getting better and action-camera competition continues to innovate. Until GoPro has an answer for how it's going to grow beyond just the Hero line of action cameras, the stock's upside will be limited.
Has GoPro turned its business around? The company has definitely improved its operating efficiency, but the long-term question about how it will grow revenue remains, and that's why this isn't a growth stock I would be buying today.
