GoPro (NASDAQ:GPRO) investors had reason to celebrate after the release of the company's latest quarterly report last week, but the jubilation was short-lived. GoPro's fourth-quarter revenue grew to $633.9 million, an increase of 75% year over year that soundly trounced the average analyst estimate of $580.3 million. The bottom line was also significantly better than expected, with the average estimate calling for earnings of $0.70 per share, while actual earnings came in at $0.99 per share.
The blockbuster quarterly results prompted shares to gain 14% in after-hours trading, but the gains quickly reversed, and the stock closed on Feb. 11 nearly 18% lower than its closing price prior to the earnings release, though the stock was rising in early trading Thursday. GoPro now trades in its lowest range since August. Let's take a look at why shares have dropped steeply after an impressive quarter.
GoPro's guidance underwhelmed
GoPro's projections for earnings between $0.15 and $0.17 per share in the current fiscal quarter is likely the main impetus for the recent stock contraction. Prior to the release of GoPro's guidance, analysts were projecting that earnings per share would come in at $0.17, putting the average estimate at the high end of the company's target. GoPro has a track record of being conservative with its estimates, so it's not unreasonable to think that it will once again beat its own targets by a significant margin, but the big drop does provide insight into the market's expectations for the company. Even after the big price contraction, GoPro still has a forward price-to-earnings ratio of roughly 61, so any news that hints at impediments to a spectacular growth trajectory has the potential to trigger significant stock decline.
GoPro's COO is departing this month, and the stock lockup will soon expire
The recently announced departure of Chief Operating Officer Nina Richardson and the expiration of GoPro's stock lockout are also likely contributors to the stock collapse. Richardson has served in the COO role for the last two years, and the departure of high-level management from a young, growth-dependent company may be particularly worrying to investors amid concerns about GoPro's ability to manage competition and expand beyond being simply a hardware company.
The restrictions set on selling shares from GoPro's second public offering are set to expire on Feb. 17. 76 million shares, or roughly 60% of the company's total shares outstanding, will become eligible for sale. The disappointment over GoPro's first-quarter guidance starts to look more worrying for shareholders when combined with the potential for massive sell-offs following the expiration of the lockup.
What does the competitive landscape look like for GoPro?
At present, GoPro dominates the niche it operates in. If the action camera market continues to grow, it's likely that larger companies will devote more resources to becoming players in the field.
GoPro's last big stock contraction coincided with the news that Apple had received a patent for an action camera design. Whether or not the tech giant actually plans on releasing its own camera remains uncertain, but the the looming threat that a resource-rich competitor could disrupt GoPro's dominance remains.
Sony is currently GoPro's biggest competitor in the action camera segment, accounting for 6.5% market share, according to IDC, but it has yet to put a big marketing push behind its cameras. GoPro has about 47.5% of the market. GoPro is looking to international expansion as one of its main avenues to big growth: Fourth-quarter revenues from European, Middle Eastern, African, and Asia Pacific markets were up 70% year over year, but it needs to develop and maintain its brand strength in order to deliver continued wins against low-priced alternatives.
In order to mitigate the potential effects of incoming competition, GoPro is focused on branching out beyond hardware and establishing itself as a media company. Evidencing some momentum on that end, the number of videos published on the company's YouTube channel increased 71% year over year in 2014, while views increased 84%, and total minutes watched were up 140%. GoPro's YouTube channel will probably never generate significant revenue, but it does offer brand building and defensive benefits.
The company is also working on expanding its own video network. To date, GoPro has signed deals with Roku, LG, Virgin America, and Microsoft to carry content filmed on the company's cameras. The company also has deals with the X Games and the NHL, with its cameras being used to provide broadcasting angles. If GoPro can continue to build deals for sports coverage in domestic and international markets, it will have scored big on its quest to become a lasting athletics brand.
For investors, the performance of the company's media initiatives should provide a valuable indicator as to the staying power of GoPro's hardware.