Between last June and October, GoPro (NASDAQ:GPRO) stock soared from its IPO price of $24 to the mid-$90s, but then it slipped back to the mid-$60s by the end of the year. Now that GoPro shares have cooled down a bit, investors might be wondering whether the stock will pop or flop in 2015.
Why GoPro might pop in 2015
GoPro has become a noun for all action cameras, while rivals' devices are often referred to as "GoPro knockoffs." That reputation is well deserved, since GoPro controls nearly half of the action-camera market, according to research firm IDC.
Last quarter, GoPro's revenue rose 45.7% year over year and 14.5% sequentially to $280 million. GAAP-adjusted net income came in at $14.6 million -- a vast improvement from a loss of $1.1 million in the prior year's quarter.
On average, analysts expect GoPro to earn $1.26 per share on $1.66 billion in revenue in fiscal 2015, which would respectively equal 23.5% and 23.8% YOY growth from fiscal 2014 forecast. Meanwhile, Futuresource Consulting estimates that global shipments of action cameras could rise from 5 million shipments in 2013 to 9 million by 2018. If GoPro keeps dominating that market, its top- and bottom-line growth should remain healthy.
Lastly, new initiatives like consumer drones and an expansion of its media network could diversify GoPro's top line away from action cameras. GoPro's media network -- which hosts user-created and professional content on YouTube, the Xbox Channel, and other streaming outlets -- probably won't generate meaningful revenue in 2015, but its viral approach could be a cheaper way to promote GoPro's products than regular advertising.
According to Teal Group, annual spending on drones could nearly double from $6.4 billion to $11.5 billion over the next 10 years, with civilian (consumer/commercial) drones claiming 11% of that market. If GoPro successfully blends rising interest in action cameras with drones next year, its stock could lift off.
Why GoPro might flop in 2015
The biggest problem with GoPro stock is its valuation. Even after losing nearly a third of its value since October, the stock still trades at nearly 200 times trailing earnings. That premium valuation can cause the stock to be traded heavily on news instead of fundamentals.
Last year, GoPro stock fell on the CEO's donation of shares to charity, a retracted claim that the camera could cause head injuries, the pricing of a secondary offering, and fears that the lockup expiration in December would cause the stock to plunge. GoPro recovered from most of these dips, but they highlight how single headlines can shake out investors.
Moreover, GoPro's low-end market competitors such as Polaroid, HTC (NASDAQOTH:HTCCY), Kodak, and Sony (NYSE:SNE) shouldn't be ignored. Most of these rivals offer "good enough" specs (such as waterproof shells and 1080p recording) in action cams for casual users for only $100 to $200. These competing devices -- which cost much less than GoPro's $400 HERO4 Silver and $599 HERO4 Black cameras -- forced GoPro to launch its entry-level $129 HERO last year.
The low-end HERO might become a "gateway" camera that tethers more consumers to GoPro's media network and encourages them to purchase Silver and Black devices, but it could also cannibalize sales of higher-end cameras and reduce margins.
GoPro's total operating expenses soared 71% YOY to $110.6 million last quarter. If expenses keep rising -- because of increased marketing, its media business expansion, and consumer drone plans -- as margins fall, its bottom line could decline.
In my opinion, GoPro still has plenty of room to run. It dominates nearly half of a market that could keep posting double-digit growth over the next three years.
However, it won't be a smooth ride. GoPro stock will rise and fall on headlines and constantly have to stave off hungry competitors. But for investors willing to stick with GoPro through these growing pains, I believe that the stock's lofty valuation will eventually reconcile with its price growth.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends GoPro. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.