For more than a decade, action cameras from GoPro (GPRO 1.17%) have enjoyed a market-leading position among adrenaline seekers. Surfers, bikers, skiers, divers, and more all capture their adventures with these durable devices.
And then there are time-constrained individuals like me who aspire to such a lifestyle and own a GoPro camera that mostly just sits there. But it's ready for me whenever I finally get around to surfing Diamond Head.
Sales for GoPro devices are still holding strong after all these years. In 2023, the company sold 3 million cameras, which was a 6% jump from camera sales in 2022.
Unfortunately, the camera hardware business has proved to be a challenging venture for GoPro. Despite the brand's popularity and ongoing strong sales, the company fails to consistently earn a profit and create shareholder value.
Several years ago, GoPro launched a new business that was supposed to be a better opportunity than hardware sales. Adoption of this product has been strong and now brings in nearly $100 million in annual revenue. But unfortunately it hasn't been a catalyst for the stock, as I'll explain.
GoPro's other near-nine-figure business
GoPro offers a subscription service that provides unlimited cloud storage of pictures and videos, certain discounts on merchandise, and access to editing software. The company ended the fourth quarter of 2023 with 2.5 million subscribers, which was a healthy 12% year-over-year increase.
Thanks to this growth, GoPro generated subscription-and-services revenue of $97 million in 2023. It generated $82 million in 2022.
Many investors believed that this other business from GoPro would boost growth and improve profit margins. However, the chart below shows that this hasn't been the case. Revenue is almost flat over the past five years, and the company's gross margin has gone down.
GPRO Gross Profit Margin data by YCharts
The explanation for this is fairly simple. While $100 million is a big number, GoPro had revenue of $1 billion for the whole business. Therefore, revenue from subscriptions and services doesn't meaningfully impact the overall numbers.
Moreover, cloud revenue should be high-margin in theory. But with only 2.5 million subscribers, GoPro lacks scale. Therefore, it's not getting a boost here.
GoPro promises to grow its opportunity again
In 2024, GoPro is expanding its market opportunity by moving into motorcycle helmets. In January, the company acquired tech-enhanced helmet maker Forcite for an undisclosed amount. Management believes that it can service half of this market it estimates at $6 billion.
I'm skeptical that a move such as this moves the needle for GoPro. While the multibillion-dollar target is big, management left room for doubt. Founder and CEO Nick Woodman said, "There will be some cannibalization because you're right, there are many motorcyclists who buy a GoPro to attach it to their helmet."
In other words, GoPro can't expect motorcyclists to buy both a camera and tech-enabled helmet. They'll buy one or the other. Therefore, it's questionable how much this acquisition really grows its long-term opportunity.
What should investors do now?
I believe that GoPro will continue to struggle with growth and profitability in coming years, which is why this is a stock I would avoid today.
Part of GoPro's struggles making a profit have resulted from difficulties in predicting consumer demand. Sometimes it has too much inventory that doesn't get sold. The problem is that it frequently updates its product lineup. If old inventory doesn't sell before new cameras come out, old cameras must be marked down, hurting profits.
In Q4, this problem surfaced yet again for GoPro, demonstrating that it's not a thing of the past. Management had guided for Q4 revenue of $325 million but only generated revenue of $295 million -- that's a big miss. And the reason is that it sold fewer of its lower-tier priced cameras than expected.
Over the next two years, GoPro intends to launch more products at even more price points. But this introduces a higher level of complexity in predicting consumer demand. And if GoPro gets it wrong, it could actually exacerbate its problems with profitability even more.
My GoPro camera is well loved even if it doesn't see as much action as I'd like it to. I believe many consumers feel the same about the brand. But when it comes to the stock, revenue growth and profits matter. I don't see either metric sustainably trending in the right direction right now, which is why GoPro stock doesn't seem like a stock worth buying today.
