GoPro (NASDAQ:GPRO) continues to take investors on a wild ride. On Oct. 30, the company delivered quarterly earnings that were significantly better than expectations. The company's targets for the current fiscal quarter may have been even more promising. Compared to the analyst predictions of $503 million for the fourth quarter, the company expects between $550 million and $580 million in sales. The holiday sales stretch is crucial for GoPro, and signs of strength heading into the period bode well for the company's broader prospects.
The impressive earnings results and big guidance have ramped up market optimism about GoPro. Even after a sell-off, the stock trades more than 11% higher since the earnings release. Things may be looking up for GoPro, but in light of the stock's big gains and history of volatility, it's worth considering some of the challenges the company faces going forward.
Other players seek to shape the action camera landscape
Research firm IDC estimates that GoPro accounts for 47.5% of personal sports camera sales. In terms of mind share, GoPro likely fares even better. Its products are practically synonymous with the emerging action camera market, and the company has the potential to soak up growth in the coming years. IDC projects that total sales for action cameras will hit 22.8 million in 2018, up from 8.6 million units in 2013, but an influx of competitors threatens to erode GoPro's mind and market share advantages.
Companies like Sony and HTC look to carve out bigger shares in action cameras, and GoPro is tasked with competing at both the high and low ends of the market. GoPro recorded a non-GAAP gross margin of 44.5% in its last quarter, up from 42.2% in the preceding quarter and 33.5% in the third quarter of 2013. The introduction of its $129 Hero camera should help it preserve, or even grow market share, in the short term, but how the new product affects margins remains to be seen.
The rush of new competitors to the action camera space also makes it more difficult for GoPro to preserve the specialness of its products and map out future iterations. The high-end resolution and framerate options offered by the company's recently released Hero 4 cameras aren't fully supported by most televisions and online video platforms. Given that the company's current product line is already quite advanced in those technical aspects, introducing a 360-degree camera seems a likely move for the company, but competitors like Kodak and Voxx International are ahead of GoPro in this department.
In addition to fending off rival products, the company must also preserve favorable relations with its manufacturing partners. GoPro doesn't build any of the pieces that make up its cameras, and some of its component manufacturers may have disparate interests in the developing action camera market.
GoPro has to be more than a successful camera company
As an increasing number of competing devices enter the market, GoPro must become more than a hardware company. Its plan to expand into a media network looks to be a way to maintain pricing power while mitigating gains made by other companies in the space, and whether or not GoPro can succeed on this front is crucial to its growth trajectory and valuation. The company's recent quarterly report touted a 92% increase year-over-year in GoPro content on YouTube, a 99% increase in views on the company's YouTube channel, and a 133% increase in total minutes watched on the platform. These numbers are good for the time being, but they don't offer much indication as to whether GoPro's media initiative will play out as needed.
A successful YouTube channel gives the company brand-building and defensive benefits, but it won't provide meaningful revenue for GoPro. The company needs to build its video network if it hopes to generate significant revenue from sponsored and user-generated content, but the costs associated with such a venture and YouTube's dominance in the online video sphere complicate that task. Even if GoPro can strengthen its own video network, it might not do great things for the company's bottom line. 2013 saw Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube generate $3.5 billion in revenue, but only $1.5 billion in net revenue after content creators were paid. The video service is reportedly profitable, however, Google doesn't give specifics on the video network's financial breakdown.
In terms of maintaining an online content network, the Internet giant enjoys major scale and infrastructure advantages compared to a company like GoPro, so the camera maker's ability to generate significant income from its video network appears shaky. Strength in online content distribution can do good things for product sales and brand strength, but there are reasons to doubt whether the associated expenditures can deliver the benefits needed to provide continued stock growth.
Will GoPro continue on its high-flying trajectory?
GoPro has an impressive line of products and a strong brand backing them up, but the company also has a steep valuation. Even with recent and significant upward revisions to expectations, the stock trades roughly 108 times the consensus for forward earnings and roughly 72 times projected earnings for the next fiscal year. With new competitors entering the fray, GoPro's ability to deliver a media network that adds significant value to its product ecosystem looks to be a key factor in whetherits stock delivers a win for investors.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and GoPro. The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). 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.