GoPro (GPRO +5.00%) recently dropped a bomb on its long-suffering investors by pre-announcing its dismal fourth quarter and full-year earnings. The action camera maker now expects fourth quarter sales to fall 31% annually to $435 million, well below its prior forecast for a 13% to 21% decline. Full-year sales are expected to rise 16% annually to $1.6 billion, down from 41% growth in fiscal 2014.
Source: GoPro.
GoPro's non-GAAP gross margin, which excludes $21 million in repricing costs for the Session, will come in between 44.5% to 45.5%, slightly below its prior guidance of 45.5% to 46.5%. The company will finish the quarter with $475 million in cash and equivalents, down from $513 million in the previous quarter. GoPro will also lay off 7% of its 1,500 employees, which will result in another $5 million to $10 million in restructuring costs. To top that off, GoPro's entertainment chief Zander Lurie, who was responsible for expanding the company's media presence, resigned and joined the board.
There isn't much of a silver lining here for GoPro investors, who have watched the stock plunge 80% over the past 12 months. But now that the stock is trading at nearly half its IPO price, let's discuss the logic behind holding and selling GoPro stock at current levels.
Should you hold?
It might be logical to hold GoPro stock after the company's pre-announced earnings, since it clears out most of the bad news first. With over 40% of the float being shorted, any positive headlines might cause a short squeeze. When GoPro announces its full fourth quarter earnings and conducts its conference call on Feb. 3, any news about 360-degree devices, flagship cameras, VR partnerships, or drones could lift the stock.
GoPro's top line growth also hasn't turned negative yet. If the company sticks to its launch schedule and releases the Karma drone in the first half of 2016 and the new "Hero 5" and 360-degree cameras in the second half, favorable year-over-year comparisons might squeeze out the short sellers and bring back investors. With a market cap of $1.7 billion, no debt, and a PEG ratio of 0.5, GoPro also remains a cheap takeover target for tech companies looking for an established hardware brand.
Meanwhile, Facebook's (FB +1.81%) 360-degree News Feed videos, Oculus Story Studio movies, and the upcoming launch of the Oculus Rift VR headset could whet mainstream appetite for 360-degree capture devices. Alphabet's (GOOG +1.99%) (GOOGL +1.71%) YouTube could do the same through its Jump VR filmmaking partnership with GoPro. If GoPro launches affordable 360-degree capture devices at the right time for this nascent market, it could gain new customers as existing Hero owners finally upgrade.
Should you sell?
Unfortunately, many "one trick" hardware companies made similar promises as GoPro before fading away. Back in 2006, Pure Digital Technologies launched the Flip Video handheld digital camcorder, which disrupted the traditional camcorder market with flash memory and a small form factor. Most camcorders at the time were bulkier and used tapes. By 2009, the Flip captured 75% of the new market it had created, and Cisco (CSCO +1.99%) acquired it that same year for $590 million.
The Flip video camera. Source: Pure Digital Technologies.
Unfortunately, that market was quickly commoditized by cheaper devices and smartphones, and Cisco quietly killed the Flip two years later. GoPro's disruptive growth, its creation of a new market, and the subsequent arrival of nimble challengers and knockoffs all closely resemble the Flip's rise and fall.
GoPro's management also made lots of bad decisions last year. Repricing the Session twice should never have happened, since it should have been launched as a low-end entry-level device instead of a premium one. Authorizing a $300 million buyback was a short-sighted decision, since the cash could have been better allocated toward acquisitions, R&D, or marketing. GoPro also grossly overestimated its quarterly sales twice in a row, and CEO Nick Woodman's promises of cloud-based backup, drones, 360-degree cameras, and media expansion efforts all remain too abstract to quantify.
What about buying more?
While there are solid reasons for holding or selling GoPro stock, investors shouldn't buy more at current prices. It might be tempting to average down, but GoPro's execution problems, shortsighted decisions, and lack of bullish catalysts all indicate that the stock will remain under pressure in the near term. Unless GoPro can prove that it isn't a one-trick pony this year with head-turning new products, I think that its battered stock still has a lot of downside potential.
