GoPro (GPRO 0.28%) disappointed investors in a big way last year. Shares of the mountable camera maker plummeted more than 72% in 2015, and are now trading around $16 a pop, or near the stock's 52-week low. The once high-flying growth stock has suffered since its promising initial public offering in 2014. Here are three headwinds threatening GoPro's growth story today and why investors should hang in there for the remainder of 2016.
Questionable pricing power
GoPro's ability to successfully sell its products at premium prices came into question last year when it released its HERO4 Session camera to weak fanfare. The company initially launched the compact device at a price point of $399, despite a U.S. market flush with competing action cameras at lower prices. Polaroid, for example, released The Cube for just $99 as a compact camera meant to compete with GoPro's HERO4. Disappointing sales of GoPro's new camera followed.
GoPro's chief executive, Nick Woodman, later admitted that the $399 price was too high and lowered the price by $100 last September. Unfortunately, the market said "not good enough" and GoPro was forced to reduce the price of its HERO4 yet again, this time to $199.
Having a single product flop is nothing new in the consumer products space. However, this might indicate a deeper problem for GoPro if its devices aren't able to command the same pricing power that once made it a household name with investors.
This could be a serious headwind for GoPro going forward because it needs pricing power to help offset their long product refreshes. As Matt Burns of TechCrunch points out, GoPro's cameras are of superior quality to the point that they can "survive a fall from the edge of space." As a result, customers don't need to replace their GoPro cameras as often as other consumer devices.
New deep-pocketed entrants to the action camera space combined with older rivals are yet another headwind facing GoPro today. The company competes with globally recognized brands including Canon, Nikon, Polaroid, Sony, and Panasonic. These foes aren't afraid to undercut GoPro on pricing, as mentioned above in regards to Polaroid and the launch of its Cube device. Competitive pressures could weigh on GoPro going forward if the company isn't able to differentiate itself in a big way.
Jumping into the drone arena is one way GoPro hopes to set itself apart from rivals. GoPro reportedly plans to release its Karma drone later this year. However, that too is an increasingly crowded market and one in which GoPro won't benefit from a first-mover advantage. The company is currently being hush-hush about its Karma device, which could suggest a consumer launch is still months in the making.
Perhaps virtual reality is a bigger opportunity for GoPro. After all, it already has key partners in this emerging space, whereas its drone ambitions are less clear.
GoPro teamed up with Alphabet (GOOG 5.34%) (GOOGL 5.32%) last year to create a 16-camera rig dubbed Odyssey (pictured above) for capturing immersive three-dimensional virtual reality content. GoPro's hardware utilizes Google's VR platform Jump to enable filmmakers to capture and share 3D and 360-degree content. GoPro also acquired Kolor, a French VR and media solutions company. These strategic tie-ups could give it an edge in the emerging virtual reality space and ultimately help offset increased competition in its core consumer cameras business.
Analysts' worry that GoPro's software lacks ease of use and therefore could make consumers less likely to buy its newer products. It's true that improving usability remains a challenge. Woodman substantiated its software woes in a recent TechCrunch interview, saying, "A GoPro camera is currently like an iPod without iTunes."
To address this issue, GoPro is heavily investing in software innovation. Therefore, the software headwind should be less of a problem toward the end of 2016 once some of these initiatives come on line. The company, for example, is developing a software platform that includes a tool for editing video content on the fly. This, together with its mobile app for quickly trimming and sharing large amounts of video footage, should make it easier for customers to get the most out of their GoPro cameras in the future.
Ultimately, if GoPro hopes to transform from purely a hardware play into an entertainment powerhouse, it must offer customers a seamless software experience that makes it easy to manage and edit raw video footage captured by its devices.
Why investors shouldn't worry
These are all real challenges to GoPro's growth story. However, they are also short-term issues that the company should be able to overcome in the quarters ahead. Longer term, GoPro still has ample room to expand its market share in the overall camera space. There is also the potential for it to monetize its growing GoPro Network and attract lucrative advertising deals.
Therefore, with the stock now trading around $16 a pop, or just 3% above its 52-week low, I believe GoPro stock offers long-term investors promising upside from here -- despite the setbacks discussed above. Moreover, there is no denying that this momentum stock now looks cheap trading at just 0.61 times earnings growth. That compares to a price-to-earnings growth ratio of 1.01 for the industry.