Shares of action camera maker GoPro (NASDAQ:GPRO) are down nearly 60% from its 52-week high, due to concerns about its valuation, competition, and future expansion plans. Will the upcoming launch of its "Hero 5" camera bring investors back, or will it be too little, too late?
What we know about the Hero 5
Current rumors suggest that the Hero 5 will sport a 2800 mAh battery, record 8K video, and have a waterproof depth of 60 meters. It's unclear what its 8K framerate will be, but it is expected to record 4K video at 60 fps and 1080p video at 120 fps. By comparison, GoPro's top-tier Hero 4 Black is equipped with an 1160 mAh battery, records 4K video at 30fps, and has a waterproof depth of 40 meters.
Like the Hero 4, the Hero 5 will likely be offered in Silver and Black editions which will cost $400 to $500. GoPro is expected to launch the new flagship cameras by the end of the year.
Who needs an 8K action camera?
The Hero 5's specs, if accurate, would be ridiculously overpowered for most average users.
8K videos would ideally be viewed on 8K TVs, which will start launching later this year. However, it's unlikely that 8K TVs will gain much traction by the end of the year. 4K TVs only accounted for 20% of global TV sales in 2014, according to research firm DisplaySearch. Meanwhile, content providers only recently started offering 4K content.
Moreover, 8K content would require a lot of storage space. On GoPro's Hero 4 devices, a nine-minute 4K video filmed at 30 fps eats up 4GB of space. Since an 8K video would be even larger, the average GoPro Hero 5 user would need a huge SD card and hard drive to store those files. A high-end computer would also be required to edit and convert those bulky videos for online viewing.
Will GoPro run out of room to innovate?
Simply put, GoPro's high-end devices are recording content at resolutions which aren't practical for regular viewing on TVs or sharing across social networks.
This leaves GoPro vulnerable to hungry competitors like Sony, HTC, Xiaomi, Kodak, and Polaroid, which have all launched cheaper action cams than GoPro. All those rivals share a common goal -- to offer "good enough" specs while undercutting GoPro's cheapest devices.
For example, Xiaomi's Yi Action Camera, which costs around $65, records 1080p video at 60fps and captures still shots at 16 megapixels. By comparison, GoPro's low-end Hero, which costs $129, records 1080p video at 30fps and takes 5 megapixel pictures.
Good news and bad news
The good news is that those rivals haven't noticeably dented GoPro's growth yet. Last quarter, GoPro's revenue rose 75% year-over-year as net income improved 267%. Gross margin rose from 42% to 48%.
But the shifting market forces are hard to ignore. If GoPro's high-end devices hit a technological plateau as low-end competitors commoditize the low-end market, its top and bottom line growth could stall out. If those cheaper rivals gain ground in overseas markets like China, GoPro could have a tough time expanding overseas.
GoPro sees the writing on the wall
In response, GoPro is widening its defensive moat with two core strategies.
First, GoPro has premium brand recognition. Today, action cams are frequently called "GoPros" while rival devices are known as "GoPro knockoffs". GoPro is reinforcing that reputation by expanding the GoPro Network, which hosts user and professional content on YouTube, Roku, Microsoft's Xbox Live, and other platforms.
Second, GoPro might launch consumer drones later this year. Research firm Teal Group estimates that global annual spending on drones will rise from $6.4 billion to $11.5 billion over the next decade. Civilian drones are expected to account for 11% of that market. GoPro faces regulatory hurdles in this market, but drones could help the company diversify its business away from action cameras.
Despite its attempts to expand beyond action cameras, GoPro's near-term future looks murky. Even after its steep plunge, the stock trades at 45 times trailing earnings. If the rumored specs for the Hero 5 are accurate, GoPro could have a tough time convincing existing customers to upgrade. To deal with lower demand for its premium devices and low-end ones, GoPro might have to lower its prices, which will weigh down its bottom line.
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 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.