Many of us who are bullish on GoPro (NASDAQ:GPRO) have developed our thesis around the assumption that the company is emerging into a more diversified business with multiple revenue streams. We're talking about drones, virtual reality, and entertainment ad nauseam. But really, after this crazy 2016, it's time for GoPro bulls - myself included - to take a step back on those assumptions and possibilities.
The Karma Drone initially looked acceptable with its features, and impressive on price point. But it failed in a major way for GoPro as the company was forced to recall the device amidst reports that the product was losing power mid-flight. The only thing that mitigated this terrible recall (somewhat) was that GoPro was smart with the rollout and only a limited number of drones had actually shipped. But that's a modest silver lining. The Karma product could have been a big hit during the Christmas season. It was an opportunity to finish a lackluster 2016 with a bang - an opportunity the company will never get back.
Virtual reality looks promising, with GoPro offering the Omni rig and producing some great VR content. But while things look pretty cool, future applications for this product, and the overall monetary benefit remain clouded in questions.
Finally, GoPro's attempt to become a content creator is officially dead, as the company has closed down that division of the business. The content produced was very impressive (be sure to check out mezmerizing underwater cave explorations to see what I'm talking about). But GoPro opted to shut down the division to focus in on cameras. Considering the financial struggles the company has had, this probably isn't a bad move. Yet this cut in the work force is really a reflection of the business not expanding into something bigger and better.
I say all of that to say this: If you've been bullish on a GoPro investment, you've very likely been counting all these chickens before they hatched. Unfortunately, some of these are now dead. Some are clinging to life (Karma is relaunching), but any possible benefit will now be postponed. The long-term prospects for the company have gotten murkier over the past year, not clearer. For that reason, the lifeblood of GoPro's business is 100% in its cameras. Is it possible for GoPro to actually thrive while simultaneously living up to the disparaging label of "one-trick pony"?
We really need to ask ourselves two questions as we take a step back to reevaluate a bullish stance in a GoPro investment. First, we need to examine how the HERO5 line of cameras is performing. But secondly - and perhaps more importantly - we need to ask ourselves if GoPro is lacking any features that could entice consumers to upgrade to a future HERO6 line.
Yes. I said HERO6.
How's HERO5 Doing?
When it comes to the cold hard sales numbers for the GoPro HERO5, we still don't have anything concrete. But since the new line launched on October 2nd, 2016, there are some signs pointing to this being a very strong product launch.
For starters, popular YouTube content creators such as Mr. Ben Brown (over 600,000 subscribers) and Casey Neistat (over 6 million subscribers) have not only used the HERO5 in their videos, but they've also talked about what they like with this model. That's not a guarantee the product is a hit with the masses, but it's encouraging that influencers in the video world are supporting the product.
Initially, when the HERO5 launched, there was a fiasco with Amazon (NASDAQ:AMZN) selling the camera, which led GoPro to pull its camera from the online retailer's website. That's now water under the bridge, and the HERO5 is selling quite nicely on the website.
In the action camera space of the Amazon website, GoPro holds eight of the top ten spots. The HERO5 unsurprisingly holds the top spot, while the HERO5 Session is in the fifth slot. If we zoom out a little to Camera & Photo popularity, the HERO5 holds the 12th spot. (Keep in mind that both cameras and camera accessories fall in this category, with most of the items selling ahead of the HERO5 being accessories.)
But most surprising to me, if we zoom all the way out to the entire Electronic section of Amazon, the GoPro HERO5 holds the 42nd spot - very high considering the thousands upon thousands of products offered on the site. That doesn't give us concrete sales numbers, but I think we can safely say sales are strong.
With the 42nd spot on Amazon, the HERO5 is currently one spot higher than the Samsung (OTC:SSNLF) Gear VR. Recently, at the Consumer Electronics Show in Las Vegas, Samsung announced it has now sold 5 million of this virtual reality headset. Now, that doesn't mean the HERO5 has already sold more than 5 million units - that's not how the rankings work.
It just means that right now, the HERO5 is outselling the Gear VR. Of course, that's somewhat to be expected, since the Gear VR has been out for just over a year now, while the HERO5 is new. These Amazon sales rankings are just another positive indicator of several we could choose from to make this point.
Based on its seemingly steady popularity, it's my opinion that the HERO5 can outperform GoPro's all-time bestselling product, the HERO4. Remember that sales have slumped over the past year because the company failed to release any new products. But going back to the first four quarters following the HERO4 release, the company broke sales records by shipping right around seven million cameras.
Suppose GoPro is able to increase camera sales 10% when comparing the HERO5 launch and the HERO4 launch. That would be around 7.7 million cameras over the next four quarters. The company is also selling two models of its Session camera, which both have lower price points than the HERO5. But let's assume for simplicity that the company achieves a 25%-25%-50% sales blend for the HERO4 Session, HERO5 Session, and the HERO5 respectively.
Assuming 7.7 million cameras sold
|Camera||Sales||Price Per Unit||Total|
|HERO4 Session||1.9 million||$199||$378 million|
|HERO5 Session||1.9 million||$299||$568 million|
|HERO5||3.9 million||$399||$1.5 billion|
|Total||7.7 million||$2.4 billion|
Based on the (very) crude numbers in this scenario, GoPro's cumulative revenue over the next four quarters could approach $2.4 billion just by having its new camera lineup being only moderately better than its previous lineup. With a market cap currently under $1.25 billion, those would be extremely welcome revenue numbers.
However, even assuming increased sales over the next four quarters, GoPro is not as lean a company as it once was. During the HERO4 heyday, the company got around 20% of its revenue down to the bottom line. I wouldn't expect that to be the case right now, consider the costs of the Karma development and subsequent recall, staff downsizing, and the building of a cloud network. But considering the company hasn't been profitable in over a year, I think investors will be excited for any revenue that gets turned into profit.
But investors beware: If HERO5 sales dip below HERO4 sales, or even just stay flat, those could be fairly strong indications that the GoPro brand is losing momentum with consumers. I personally believe sales will tick higher, but there's not much to substantially back that belief with at this point.
But Will Consumers Update To HERO6?
For current GoPro investors, it's not just about the HERO5. Remember that any other form of revenue is yet unproven for the company. Bulls need the HERO5 to be a success, but we also need customers to upgrade their devices the next time GoPro refreshes its lineup. So, is there anything that the HERO5 fails to deliver that HERO6 could potentially offer to entice consumers to upgrade?
It turns out the answer is yes. Here are a couple of features that GoPro is hopefully cooking up for the next generation.
- 8K Video
Some experts were surprised that the new camera lineup from GoPro didn't allow 8K video, but rather stuck with the 4K video quality that was already available with the HERO4. This led some to believe customers had no incentive to upgrade. But turns out that HERO5's intrinsic waterproof design - shedding the old waterproof housing - was incentive enough.
Not so for the next generation. Image quality improved with the HERO5 because of image stabilization and the ability to shed its case. If the HERO6 is going to be a better quality image, it needs to jump to 8K.
For the skeptic of this point, I realize that very few people actually have a device capable of viewing 8K. It's a fair point. But the 8K sensor would allow for better slow motion 4K video, and higher quality 4K video in general. This would be to the benefit of both content creator and content consumer alike.
The bears talk about GoPro's dwindling future because smartphone cameras are constantly increasing in quality. But what if GoPro could flip that conversation by becoming more like a smartphone?
As I consider the trends in technology, a GoPro HERO6 essentially needs 4G capability. The reason for that is the abrupt rise in live video streams in 2016. Facebook, YouTube, and Twitter are all making big investments in live stream. Live stream videos are where social media is headed, and Forbes has pegged it as one of five trends that will dominate social media this coming year.
Presently, GoPro cannot accommodate this trend. It touts its app as a quick and easy way to edit your videos for social media, and that's great. There will always be a place for clean and edited videos. But to keep pace in a changing world, live video streaming - and therefore 4G - will need to be in the HERO6.
- Improved battery
Both 8K resolution and 4G connectivity would require GoPro to substantially improve its battery potential. For the HERO5, battery life is around two hours for normal video, and one hour for 4K video. Battery life would at the very least need to stay the same for these two improvements to be truly enticing.
So to sum up for the future HERO6: It could have some enticing features for consumers looking for a new and improved GoPro. That should be encouraging for GoPro bulls, especially if HERO5 performs well and the GoPro is still strong when the time for a camera lineup refresh comes.
One Closing Wildcard
There is one last piece of the puzzle I don't quite know where to put. It's not a camera, but shouldn't be thrown in with the previously mentioned new revenue fails. In my mind, GoPro's cloud subscription service GoPro Plus is a complete wildcard at this point. We really don't know much about it except that it costs $5/month.
When GoPro reports 4Q2016 results, I'll be watching for two things specific to this service. First, I'll want to know what percentage of HERO5 owners immediately took advantage of the GoPro Plus service. Second, I want to know what kind of profit margin this service could potentially have. Until we know those two things, it's really hard to be decisively positive or negative about the financial opportunity it provides the company.
Of course, even beyond financial opportunity, one must entertain the idea that if GoPro Plus is wildly successful, it could in fact make the GoPro brand more "sticky." That is, if consumers already have footage stored on the GoPro cloud, perhaps they'll be easier convinced to stick with the company as new products are released.
For now, I'll just leave you with my belief that - everything else aside - the camera business can continue to carry this company in the near term, although not for huge investment gains, but enough to reverse the down-trend. However, longer term, investors really need the company to deliver on something else to be a truly exciting investment.
Disclosure: I am/we are long GPRO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.