GoPro (NASDAQ:GPRO) stock has taken investors on a wild ride since its June IPO. Initial pricing valued the camera maker's shares at $24, but optimism about the company's growth prospects and the introduction of a new product line have driven its stock up more than 120% in just over four months. Shares currently trade in the $69 range, but October saw GoPro trade as high as $98.47.
Highlighting volatility in the growth-dependent stock, GoPro has experienced meaningful dips in its valuation as a result of unfavorable news stories. An announcement that the company had donated roughly $500 million in stock to charity prompted investor fears that shares would soon flood the market and corresponded with an almost 10% price dip. However, this occurred just days before the company hit its current peak valuation. The next story to ding the company came in the form of a since-retracted report that a brain injury sustained by Formula 1 racer Michael Schumacher in a skiing accident had been worsened by the GoPro camera he was wearing, again causing shares to fall as much as 10%. While additional flareups in the news have the potential to negatively affect the company's stock, there are more pressing risks to consider.
An influx of competitors could turn GoPro into the next BlackBerry
GoPro has done an impressive job of building a market for its cameras, which are widely viewed to be high-quality and innovative. These devices are virtually synonymous with high-definition personal sports cameras, and the company has built a compelling brand that continues to gain strength. There's no guarantee things will continue to play out that way, though. While there are a variety of obvious differences between the two companies, GoPro investors might do well to study the cautionary tale of BlackBerry (NYSE:BB).
Not long ago, the handset maker's mobile devices were nearly synonymous with the smartphone, and its innovative offerings and prominence in the cultural lexicon gave us reason to believe the company could prosper even as Apple, Samsung, and others looked to move in on its territory. GoPro, formerly Woodman Labs, has been in the camera business for roughly 10 years. In less than seven years, BlackBerry has seen its market capitalization decline from a high of $83 billion to a present valuation of roughly $5.6 billion.
Camera makers like Kodak, Voxx International, and VSN Mobil are increasingly focused on capturing GoPro's would-be costumers, and these companies have beaten the current market leader to the 360-degree camera technology that could shape the future of personal cameras. What's more, GoPro must contend with heightened competition from both high-end and low-end devices from the likes of Sony and Polaroid. The introduction of GoPro's $129 Hero camera will help the company reach a wider consumer base, but significant increases to research and development spending emphasize that the company cannot afford to rest on its laurels.
GoPro's media network might fall flat
GoPro seems to realize that a strict reliance on hardware is a dangerous proposition. At least in the medium term, the company's plan to expand as a media platform may be more about maintaining brand strength and mitigating market share losses than generating ad revenue. The company has done an impressive job of building credibility with the action sports crowd, and its recently announced deal with the NHL hints at the promise of more mainstream content opportunities, but a successful media network could be necessary to stave off the competition.
While partnerships with Microsoft, Facebook, and Google's YouTube would seem to cast the future of the company's content network aspirations in a favorable light, the amount of footage uploaded from competing devices will also increase on these platforms, regardless of promotional deals and sponsorship. GoPro currently enjoys a roughly 50% share of the personal HD camera market, but its products could lose a lot of their shine going forward if the company can't deliver big wins with its media platform and proprietary software.
Failure to meet revenue and margin expectations could tank the stock
GoPro stock currently trades at roughly 223 times trailing earnings, indicating that even small stumbles on its growth path could have a calamitous impact on its valuation. GoPro's last quarter saw the company record a gross margin of 42%, but the rise of competitors, increasing R&D expenditures, and the introduction of its $129 Hero camera suggest that this figure could shrink significantly in coming years. Using consensus estimates, the stock has a forward-looking price-to-earnings ratio of roughly 96 for fiscal 2015 and a P/E of roughly 73 for fiscal 2016. The company's rise has been undeniably impressive, but such a steep valuation and variables in the progression of the personal camera segment suggest plenty of opportunity for big dips. There's also the possibility of broader market contractions to consider. If (and when) the market turns bear, high-flying growth stocks like GoPro stand as likely casualties.
As a company, there's a lot to like about GoPro. It essentially created the segment it's operating in, and there's a compelling brand behind its laudable products. On the other hand, there are also compelling reasons to view its growth trajectory and valuation with cautious eyes. For better or worse, GoPro's stock looks to take investors on a ride that rivals even the most incredible extreme sports videos in the excitement category.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), and GoPro. The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.