Shares of GoPro (NASDAQ:GPRO) recently tumbled to their lowest post-IPO price after Morgan Stanley analyst James Faucette reduced his price target on the stock from $62 to $35. In a note to investors, Faucette called disappointing sales of the tiny HERO4 Session camera to be a "harbinger of future disappointments absent marked improvements in usability."
Faucette also claimed that GoPro's editing software didn't have "compelling differences" with other iOS and Android video editing apps, which could cause its action cams to "remain a niche alternative to smartphone video." That outlook certainly sounds gloomy, but I don't believe investors should panic. Let's discuss three reasons investors should stop worrying about GoPro's near-term volatility and focus on the long game instead.
1. GoPro's premium cameras outsell the Session
In September, GoPro CEO Nick Woodman admitted that the HERO4 Session wasn't selling as well as expected, but it was "simply because of how strong Silver and Black are." That same month, CFO Jack Lazar stated that the Silver and Black cameras still accounted for "over 50%" of GoPro's unit sales and revenue.
After reducing the price of the Session from $400 to $300, GoPro introduced its last camera of the year, the Wi-Fi enabled Hero+, for $200. This gives GoPro a total of six cameras between $130 and $500 -- three premium devices (Black, Silver, and Session) and three low to mid-range devices (HERO, HERO+, and HERO+ LCD). The Session might be the weakest link, but downgrading the stock based on sales of that single device -- especially when it's being cannibalized by other GoPros -- makes no sense.
Back when GoPro first launched the Session, I criticized its $400 price tag since it cost the same as the Silver. The Silver has a touch LCD screen, which the Session lacks, and shoots higher quality photos and videos. The only advantage the Session had over the Silver was its ice-cube sized form factor. If GoPro was trying to mimic the iPod Shuffle strategy, it missed the point -- the Shuffle was always marketed as a cheaper alternative to the full-sized iPod. But now that GoPro has slashed the Session's price, it might appeal to a certain niche of users who aren't ready to commit to the Black or Silver.
2. Untapped markets and beefy margins
Last quarter, GoPro's overseas revenues soared 126% annually and accounted for over half of its top line. That was up from 66% growth during the first quarter. The company's cameras have been enormously popular in China, which boosted its Asia-Pacific revenues by 183%. This means overseas demand could easily offset slower growth in the U.S. market. Moreover, GoPro's new initiatives, like VR filmmaking, drones, and media expansion, could eventually become new sources of revenue growth.
There's also an irrational fear that GoPro's margins will plunge as the action cam market is commoditized by cheaper rivals. In reality, GoPro reported that its GAAP-adjusted gross margin expanded from 42.1% to 46.3% between the second quarters of 2014 and 2015. Even GoPro's cheapest cameras are also sold at impressive margins. An IHS teardown of the $130 GoPro Hero, for example, revealed that the "low-end" device only cost $47 to manufacture.
3. Fundamentals matter, technicals don't
GoPro is currently a stock dominated by traders instead of investors. However, technical weakness never suppresses fundamental strength over the long-term. GoPro now trades at around 13 times forward earnings, versus a forward price-to-earnings of 16.6 times for the S&P 500. GoPro also has a 5-year PEG ratio of 0.5, based on Thomson Reuters' estimates. A PEG ratio under 1.0 is usually considered a strong buy signal for most value-seeking investors.
GoPro reported double-digit revenue growth and triple-digit earnings growth last quarter, and it has beaten top and bottom line estimates every single quarter since its IPO last July. The bears, who were shorting 27% of GoPro shares as of Sept. 15, probably won't keep shorting GoPro stock into its third quarter earnings report on Oct. 28. Instead, they'll likely cover their positions and cause the stock to jump on a "short squeeze" before earnings.
Over the long-term, this nauseating tug-of-war will pass in fundamentally sound stocks as short-sellers move on. Therefore, investors who believe in GoPro's long-term growth potential should ignore this volatility and focus on the more important numbers instead.
Not for the faint of heart
In previous articles, I addressed bearish myths about GoPro, discussed a potential suitor for the company, and offered a rebuttal to Barron's negative view on the stock. GoPro isn't one to bet your life savings on, but I believe the stock is so oversold that the fundamentals can no longer be ignored. The shares might fall further in the near-term, but I'm personally looking to add to my position on this weakness rather than sell them all on strength.