GoPro (GPRO 8.04%) stock has been absolutely slammed recently, down nearly 50% in just two months. Many investors are probably wondering: Is there a reason to worry? A close look at the wearable and mountable camera maker's current situation provides solid reasons to brush off this sell-off and keep holding. Even more, the severity of the stock's recent decline may be presenting an excellent buying opportunity.
The new GoPro Hero4 Session. Image source: GoPro.
Why is GoPro stock down?
What's suppressing GoPro stock in the first place? Two factors, mainly. Surprisingly, neither of the reasons for the plummeting stock price are cause for much concern upon a close examination.
The main reason GoPro stock is down is most likely due to the recently reported weaker-than-expected guidance from video chipmaker Ambarella, a chipmaker that produces the video chips for GoPro. It's easy to recognize the correlation between GoPro's falling stock price and Ambarella's guidance because the camera maker's stock fell as much as 10.6% in the trading day following Ambarella's second-quarter earnings release.
Ambarella's guidance for third-quarter revenue in a range of $90 million-$93 million represents 37%-47% year-over-year growth. Pretty good, right? Not exactly. This was slightly below the Q3 guidance analysts were expecting. And here's where the real concern for some investors regarding GoPro comes in: The driver behind the lower-than-expected guidance was a weak outlook for wearable camera revenues, specifically. And the outlook for Ambarella's wearable camera revenue didn't just represent slow growth. The company was expecting a sequential and year-over-year decline in the segment.
But management was quick to offer a specific reason for the year-over-year decline during its most recent earnings call, saying it was simply due to an unusual product cycle in which the concentration of newly released wearable cameras this year was in Q2 rather than Q3 (as it was last year), making year-over-year comparisons tough. GoPro even went out of its way during the earnings call to say that demand for wearable cameras didn't look out of the ordinary: "However, we see the average of Q2 and Q3 unit shipments between fiscal '16 and fiscal '15 being in line with our growth expectations for this market."
The other reason GoPro stock is down could be because the market's expectations for the company's new Hero4 Session may have been too high. After the Session was launched, many investors thought of the new smaller and simpler camera as the company's ticket to a much larger audience. While this may, indeed, turn out to be the case, it might take longer than investors initially expected.
GoPro founder and CEO Nick Woodman explained the Session's potential in a CNBC interview earlier this week.
[The Hero4 Session launch is] going really well. I think what's throwing people off a little bit is that I think maybe the market is expecting it to be GoPro's top selling camera. And what you need to remember is that Session is an entirely new type of GoPro -- entirely new form factor -- and it's selling against the incumbents, Hero4 Silver and Hero4 Black, which are two of the best selling cameras in the world.
GoPro cameras. Image source: GoPro.
Woodman went on to note that the GoPro Session was launched just two months ago, and that this launch was "out of cycle." Further, he said GoPro will be pushing heavier marketing for the Session, along with its other cameras, closer to the holiday season.
Oversold?
After putting these "problems" for GoPro into context, it's hard to justify such a significant sell-off for the stock. Further, the company's valuation is actually somewhat conservative in light of its recent growth and its impressive profitability. GoPro's revenue is growing by about 70%, year over year, and its GAAP and non-GAAP earnings per share are growing by triple digits. Even more, GoPro is already reporting significant and fast-growing free cash flow, up 106% in the trailing 12 months compared to the year-ago period. All this, and the stock trades at just 27 times earnings at the time of this writing.
Not only does it seem like a terrible time to sell GoPro stock, but it also appears to be a great time for investors willing to stomach some volatility to buy the stock and hold for the long haul.
