GoPro (NASDAQ:GPRO), which has shed half its market value since the beginning of the year, will report Q3 earnings on Oct. 28 after the close. This might be a "do-or-die" moment for the action camera maker, which has frequently been portrayed as a one-trick pony.
Last month, a cautious sales outlook from image processor supplier Ambarella (NASDAQ:AMBA) caused GoPro stock to plunge to fresh lows. Weaker-than-expected sales of the new HERO4 Session, which resulted in a $100 price cut, exacerbated that decline. But looking forward to GoPro's third-quarter earnings, let's discuss the four main things that might move the stock and indicate how the company is doing.
1. Growth and guidance
GoPro's third-quarter revenue is expected to rise 55% annually to $434 million, according to analysts polled by Thomson Reuters. Earnings per share are expected to rise 142% to $0.29 per share. Both figures are in line with GoPro's own forecast.
However, most investors will be more interested in GoPro's guidance for the fourth quarter and the full year. In the fourth quarter of 2014, GoPro's revenue rose 75% annually as net income jumped 267%, fueled by demand for the HERO4 Black, HERO4 Silver, and entry-level HERO -- which were all announced at the end of the third quarter. But this year, GoPro spread out its three camera launches. In the second quarter, it launched the HERO+ LCD for $300 and the HERO4 Session for $400. Near the end of the third quarter, it launched the $200 HERO+ and reduced the price of the Session by $100.
This skewed schedule makes year-over-year comparisons difficult. Analysts expect GoPro's sales to rise 9% annually during the fourth quarter and for earnings to decline 17%. If GoPro's own guidance exceeds those downbeat estimates, the stock might rally. Ambarella, which relies on GoPro's image processor orders for about a third of its revenue, could also be lifted by a positive forecast.
2. Margins and average selling prices
GoPro must also demonstrate continued margin growth to overcome concerns about recent price cuts or eventual commoditization. Last quarter, GoPro reported a non-GAAP gross margin of 46.4% -- up from 45.2% in the first quarter and 42.2% a year earlier.
During the conference call, CFO Jack Lazar forecast gross margin of about 46% for the third quarter, up from 44.5% in the prior-year quarter. However, Lazar stated that number could fluctuate by "plus or minus 50 basis points," which means GoPro must hit the high end of that forecast, at 46.5%, to claim that margins are "improving" sequentially. If it fails to do so, the bears will likely claim that GoPro's cheaper models are outselling the pricier ones, challenging Lazar's claim that cameras above $399 (Silver and Black) account for over 50% of its shipments and revenue.
But if margins are higher than expected, and GoPro expects higher margins in the fourth quarter, concerns about the Session's price cut should be dismissed. The bulls will likely focus on the fact that even GoPro's cheaper cameras are fairly profitable. The $130 HERO, for example, costs less than $50 to manufacture, according to IHS.
3. International growth
Last quarter, GoPro's international sales surged 126%. Sales from the Asia-Pacific region rose 183% annually and accounted for 17% of GoPro's revenue. That growth was driven by China, which now ranks as one of GoPro's top 10 revenue-generating countries. Sales in the Europe, Middle East, and Africa more than doubled and contributed to 33% of GoPro's top line.
By comparison, GoPro's revenue from the Americas "only" rose 39% and accounted for the remaining half of its top line. Therefore, it's important for GoPro's international sales to keep growing at rising triple-digit rates to offset slowing demand in the Americas. Global growth will also allay concerns about regional competitors, like Xiaomi's Yi Action Camera in China, gaining ground against GoPro.
4. Clearer plans for the future
Lastly, we need to hear clearer plans about GoPro's future beyond action cameras. The company has made solid progress in social media and video sharing, but it's still unclear how those parts will evolve into a sustainable media business. We also need to hear more about the cloud platform that GoPro has reportedly been developing, which could streamline how users back up, edit, and share content.
GoPro needs to tell us more about its plans for consumer drones, how it plans to compete against market heavyweight DJI Innovations, and whether regulations could throttle demand. That outlook also matters a lot to Ambarella, which supplies image processors to DJI and other drone makers.
The key takeaway
GoPro is a fundamentally cheap stock, but it's also a volatile one. Still, investors who are willing to ride out the volatility should see if GoPro can pass these four tests. If it does, they should consider picking up some shares.
Leo Sun owns shares of GoPro. The Motley Fool owns shares of and recommends Ambarella and 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.