GoPro (NASDAQ:GPRO) recently plunged toward a new post-IPO low after reporting third-quarter earnings that missed analyst estimates on both the top and bottom lines. Revenue climbed 43% annually to $400 million but missed its own guidance of $430 million to $445 million. Non-GAAP net income rose 103% to $36.6 million, or $0.25 per share, but still missed analyst estimates by four cents.

GoPro blamed a large portion of that miss to weak demand for the $400 HERO4 Session, which received a $100 price cut in late September. However, GoPro also expects a double-digit decline in sales for the current holiday quarter.

Source: GoPro.

After taking in all that bleak news, contrarian investors are probably considering buying the stock while fearful ones are looking to sell. Let's take a look at the bull and bear cases and see which one makes more sense.

Reasons to buy GoPro
GoPro's third quarter earnings were disappointing, but we shouldn't overlook the company's expanding margins and international growth. Its non-GAAP gross margin of 46.8% represents growth from 46.4% in the second quarter and 44.5% in the prior year quarter, indicating that GoPro still has pricing power. GoPro's international revenue surged 175% annually and accounted for over half of its top line. That growth, fueled by strong demand in China, partially offset a 7% decline in the Americas.

GoPro will likely introduce a quadcopter and new flagship cameras next year. If these devices sell well, sales growth will return and fears about GoPro being a "one trick pony" will fade. Its multi-camera VR film rigs should also gain more exposure through its "Jump" partnership with Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google. That partnership, which creates and displays 360-degree videos on YouTube and in Google Cardboard, could convince more filmmakers to buy GoPro's VR rigs.

Google Cardboard. Source: Google.

GoPro's social media presence and digital ecosystem also continue to grow. In October, the GoPro Channel on YouTube surpassed a billion views, a milestone which only four brands have crossed. The GoPro Mobile App was downloaded 2.7 million times in the third quarter, reaching a cumulative total of 21 million downloads, while installations of GoPro Studio rose 75% annually to 2 million. That growing digital footprint should sustain GoPro's brand appeal and widen its defensive moat against cheaper competitors.

GoPro's valuations also remain attractive. Even after estimates were lowered, GoPro stock trades at 16 times forward earnings, compared to the S&P 500's forward P/E of 16.9. Its new $300 million buyback plan, good for repurchasing about 8% of shares at current levels, should further tighten up those valuations.

Reasons to sell GoPro
Despite those strengths, we shouldn't ignore GoPro's weaknesses. Unlike smartphones, which are tethered to wireless contracts, there's no clear upgrade cycle for its action cameras. It's also unclear if mainstream customers will warm up to GoPro cameras when they already shoot everyday photos and videos with smartphones.

GoPro arguably made things worse with its skewed release schedule. In fiscal 2013, it launched two flagship cameras in the fourth quarter. Last year, it released three cameras near the end of the third quarter. This year, it launched two cameras (HERO+ LCD, HERO4 Session) in the second quarter and one (HERO+) in the third quarter. As a result, GoPro is going into the holiday season without major flagship devices to compete against last year's offerings. That's why it expects fourth quarter sales to decline 17% annually. Unless GoPro decides on a set schedule for its camera launches, it could keep confusing customers, investors, and suppliers.

The new HERO+. Source: GoPro.

The pricing and marketing mess with the Session should also never have happened. Although the Session was designed to be a "simpler" device for mainstream smartphone users, the price was far too high for that demographic, while action-cam enthusiasts bought the identically priced HERO4 Silver instead. During the conference call, CEO Nick Woodman stated that GoPro would boost marketing spend going forward, since it didn't spend enough on mainstream advertising during the second and third quarters. That move will inevitably affect margins.

Lastly, regulators could shoot down GoPro's quadcopter ambitions. If more rigid rules are introduced, GoPro's drones could have a tough time diversifying the top line away from action cameras. Moreover, DJI Innovations already has a first mover's advantage in the space, and it's unclear whether GoPro can compete.

My verdict: Hold ... for now
I was bullish on GoPro before, but I'm putting this company in the penalty box until it gets its act together. I think the brand has plenty of growth potential, but I'd like to see GoPro convince existing users to upgrade, reach more mainstream customers, and steadily diversify its business model away from action cameras. I won't sell any of my shares yet, but I also won't be buying more until I see improvement in those areas.

 

Leo Sun owns shares of GoPro. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), 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.