GoPro (NASDAQ:GPRO) cameras are on sale. But they're not discounted nearly as much as GoPro stock, which has plummeted from a peak of nearly $100 last fall -- and $65 as recently as August -- to around $20 this week.
GoPro stock took its most recent dive on Wednesday, after Piper Jaffray analyst Erinn Murphy cut her price target for GoPro to just $15. She noted that GoPro cameras are starting to show up on discount websites like Groupon (NASDAQ:GRPN).
However, it's doubtful that the evidence Murphy cites really supports the conclusion that GoPro is on pace for another big earnings miss in January. And it's even more doubtful that this has any bearing on where GoPro stock will be in a year -- let alone five years.
GoPro cameras hit the discount rack
GoPro ended Q3 with too much inventory for two products: most notably the HERO4 Session, which was not nearly as popular as management had expected. GoPro's inventory jumped to $290 million by the end of Q3, up from $153 million at the beginning of the year and $117 million at the end of Q3 2014.
Some of the inventory increase was part of a normal buildup for the holidays. (Last year, GoPro released three new cameras at the very end of Q3 and didn't have time to build up its inventory.) But some of the inventory growth was clearly unplanned. Rising inventory and sluggish sales combined are a recipe for discounting.
This has Murphy (the Piper Jaffray analyst) concerned. Not only could a lower average selling price lead to a revenue shortfall, it could also impact gross margin.
The fact that GoPro cameras have started to show up on discount and flash sale sites like Groupon, Zulily, and RueLaLa has reinforced Murphy's worries. She now expects GoPro to produce Q4 revenue of $488.1 million and EPS of $0.34. Both figures are below the midpoint of GoPro's recent guidance. For 2016, she expects revenue of $1.59 billion and EPS of $1.03, well below what other analysts are projecting.
These discounts aren't such a big deal
However, Murphy may be making a mountain out of a molehill. Groupon is currently selling GoPro's HERO4 Black camera for $419.99. That's just $80 below the original price, and it's enough to generate a very healthy profit margin, given that the HERO4 Black came out more than a year ago and components and assembly costs are constantly declining.
To look at it another way, iPhone prices are routinely cut by $100 each year. The regular price of an iPhone 6 today is $100 less than when it was released in September 2014 (just a couple of weeks before the HERO4 Black rollout). An $80 discount on a year-old product is just not very concerning.
Finally, while selling GoPros through discount channels like Groupon might seem like a sign of desperation, GoPro provided its Q4 guidance just a few weeks ago. The inventory buildup and sales slowdown were both already known at that point. As a result, these factors were probably already incorporated into GoPro's downbeat guidance.
Q4 doesn't mean a thing
Murphy's analysis assumes that the weak trends playing out in the second half of 2015 will continue next year. As a result, she's modeling moderate revenue and earnings declines in 2016.
However, this ignores the central reason behind GoPro's expected Q4 slowdown. (Even in the "disappointing" third quarter, revenue rose 43% year over year and adjusted EPS more than doubled.) GoPro's main problem right now is that it is selling last year's products during the holiday season.
GoPro has improved its distribution in the past year, driving sales growth. It has also broadened its product lineup -- but the high-end Silver and Black editions released more than a year ago still account for most of its sales and profit. It's not very surprising that wider distribution and a larger product lineup aren't fully offsetting the lack of new high-end products.
GoPro has already announced plans to enter new markets in the first half of 2016. Not only will it start selling a six-camera rig for creating virtual reality content, GoPro is also introducing its first quadcopter drone. It seems likely that GoPro will release its next-generation high-end action cameras in conjunction with one of those two new products.
At the very latest, I expect GoPro's next-generation action cameras to arrive in time for the 2016 holiday season. That should drive a strong replacement cycle, higher sales to new customers, and gross margin gains. GoPro's current issues represent a temporary setback, not a permanent end to growth. That makes the stock's unwarranted decline an attractive buying opportunity.