The GoPro Killer

| About: GoPro (GPRO)


GoPro has outperformed the market since May.

GoPro's product line-up will disappoint.

New companies will take marketshare from GoPro.

GoPro (NASDAQ:GPRO) stock has been a on a tear recently, up 70% since its 52-week low of $8.62 in May. However, GoPro is significantly down -17% YTD versus 4% for the NASDAQ and 32% for Garmin (NASDAQ:GRMN), their closest comp. What's behind the recent enthusiasm, and is it justified?

The demand for GPRO shares is being driven by two principal motivations: 1) bottom fishing a stock at near-historic lows, and 2) a bet that the company's most important upcoming events, product releases for Karma and HERO5, will be hugely successful.

A quick analysis of GoPro's trading metrics support the idea that it's a relative bargain. The enterprise value to sales ratio of 1.45x is a 72% discount to the historic high of 8x, and half that of Garmin's (GRMN) 2.93x. And the stock is down 70% relative to its 52-week high of $49.49 while the NASDAQ is basically flat over this same period. If you believe in the potential of GoPro's underlying business, this is an attractive entry point for building a long position.

But a look at GoPro's revenue cycle and expected revenue growth raises serious concerns about the underlying business. Like AAPL, revenue growth for GoPro's product is release-driven. In years with a new product release, demand is low in Q1 - Q3, then spikes in Q4 following product release. In off-years, demand remains relatively flat through the year, with a baseline that is typically higher than the preceding year.

This off-year has been disastrous for GoPro, with sales far lower than last year, which was also an off-release year. The company's recently reiterated revenue guidance of $1.3-1.5B is below last year's total of $1.6B, and in my opinion even this target will be tough to hit.

Having generated only $404M in 1H16 revenue, GoPro's 2H16 revenues must be $900 to hit the bottom end of the range. In previous years, 3rd quarter revenue was -5% to +15% compared to the preceding quarter, suggesting a top-end revenue estimate of around $240M for 3Q16. Adding this to 1H16 revenue of $404M yields $644M and requires GoPro to sell more than $700M in Q4, representing its best quarter ever. Is that possible?

After two years without a new release, pent-up demand among GoPro enthusiasts, of which there are many, is likely very high. But to incentivize their customers to pony up for the new model, and to sway the number of new customers they will need, Hero5 and Karma must be perceived the way GoPro's original products were, as true game-changers. The biggest improvements for Hero5 appear to be the inclusion of GPS (which is GoPro playing catch up to Garmin and others), faster WiFi connectivity, potentially a 360-degree camera (potentially), and longer battery life. I'm not reading tea leaves, but my gut says that won't be powerful or novel enough to get people camping out on sidewalks at the crack of dawn.

Karma, GoPro's entrant into the drone space, holds tremendous promise given the expected growth of this market and GoPro's experience with this customer demographic. And one can make a case for GoPro making a highly desirable product in this space. But it's crowded, and the problems that exist for GoPro's cameras -- the cumbersome editing process, inefficient uploading, etc. -- will also exist for the Karma. While they will certainly move some units, I can't see the demand getting GoPro across the $700M goal line for Q4.

And hitting that bogey, while impressive, still amounts to a down year compared to the $1.6 billion GPRO achieved in 2015. While that might satisfy investors in the short-term, GoPro will have to convince investors it can once again dominate this vertical long-term. That's where I believe competition really sends the GPRO story sideways.

Competitors, who have been watching GoPro's successes and failures, are looking to build a better mousetrap. One in particular should worry GPRO investors. Revl, a Y-Combinator startup based in San Francisco, has developed an action camera that solves several of the cardinal issues that people have with the GoPro's Hero.

First, it contains a stabilizer, which eliminates the bothersome ups, downs, and twists that frustrate many GoPro users and make their videos hard to watch. Second, it automatically edits videos based on using the data it collects on the camera's position, speed, etc. to compile only the most riveting segments of your adventure. While it's not always perfect, the summaries give Revl users a viewable, shareable video of their experience and can altogether eliminate the "dark forest" of editing that GoPro CEO Nick Woodman acknowledged as one of its most glaring faults. Which begs the question, why did he leave it for someone else to solve?

Unless GoPro's innovation cycles become more breakthrough than incremental, companies like Revl will continue to solve GoPro's pain points and capture the growth in this market.

In summary, I think GPRO might continue to climb as people convince themselves that the stock is cheap and new product releases will right the ship. Even weak 3Q sales numbers won't be a drag, as they're somewhat expected already and bullish investors will be coming in 3Q post-release to be long before 4Q results in early 2017. But I'm bearish on 4Q results, and on the company's prospects long-term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Steven McClurg is the President of, an equity crowdfunding platform. Revl is currently utilizing Crowdfunder's platform. Crowdfunder VC Index Fund, L.P. may have invested directly or is considering investing into some or all of these companies. Crowdfunder and its affiliates do not recommend nor offer to sell securities such companies may be offering. Any such investment must be made by the company and through its offering documents.

Additional disclosure: The opinions published herein are those only of the individual and not necessarily of Crowdfunder, Inc. or its affiliates.

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