GoPro: Is The Pain Over?

|
About: GoPro, Inc. (GPRO)
by: Maks F. S.
Summary

GoPro investors have been hurt as the company never lived up to the IPO expectations.

The company recently reported earnings with increased year-over-year revenues.

We take a look at the company and the stock to figure out if it's worth taking the risk.

Source: GoPro

Over the years I have used GoPro (GPRO) as a prime example of a media hype train that inevitably ended up hitting a brick wall. Unfortunately many investors who did not really understand the market or the product ended up getting hurt.

Whether it's 3D printing, personal fitness trackers, action cameras or hundreds of other consumer and commercial trends, a good idea is often taken, blown out of proportion for monetary reasons and investors are generally left holding the bag, waiting years or even decades in hopes of recovering their capital.

GoPro is one of the best examples of this, along with others like FitBit (FIT) and Groupon (GRPN).

There is without a doubt a need for personal action cameras and I'm a user of them, and generally always have one in my camera bag.

The issue however is, no matter what investors were led to believe or what the markets were pricing in, action cameras are a limited market. The amount of people who need such a camera and use one consistently is a very small percentage of the broad photography and videography capture market.

Even though I carry one in my video bag, it only gets used when I'm afraid of damaging either my main camera or cell phone. In particular, I would not want my $2,000 camera getting shot... but... if a camera did get shot, I would want it to be a cheap replaceable GoPro.

These disconnects eventually end up becoming reality and as the media moves onto the next IPO, the stocks come crashing down.

Chart Data by YCharts

So Is the Pain Over?

I was lucky enough to get some shares in the IPO. When the price reached more than $50, I immediately sold the shares knowing that the shares were grossly overpriced and would likely never generate the required profits to trade at a reasonable multiple.

Today, however, the shares are trading at a bit over $6 per share by most accounts, and the hype has died down. One sign of this is the general lack of articles written about the company here on Seeking Alpha and in other investment marketplaces.

So, let's take a look at the most recent earnings.

The company has recently reported Q4 and full-year 2018 earnings results.

For the fourth quarter, the company reported revenues $377 million, up 13% from prior year, on which they earned $32 million, or $.22 per share.

For the full year, the company generated $1.15 billion, a decrease of 3%, on which they lost $109 million, or $.78 per share.

GoPro ended the year with $198 million in cash and investments.

Reading The Results

One thing that immediately pops out is that ever since the IPO the revenue growth has simply not materialized. I suppose that should not be a surprise considering you generally see less people walking around with selfie sticks, fitness trackers and GoPros attached to their head.

(I would ordinarily use Ycharts however they do not have data for GoPro. Thanks to StockRow.com for providing the tools for these graphs.)

Furthermore, since immediately following the IPO, they have yet to be profitable for the full year. Is going public supposed to take a profitable company and make them lose money?

What investors may find most fascinating is that the decrease in revenue was fairly projected for a consumer company.

One of my favorite tools to see how a company is gaining traction is through Google Trends.

It's a free tool that Google provides that lets anyone see the interest (in anything) over time using search results.

As we can see, GoPro's search trends line up perfectly with the drop in revenues.

Source: Google Trends

We can further break that down and look at only the Google Shopping search results where we find the same pattern.

Source: Google Trends

Unfortunately, these trends are not limited to just the United States but are in fact worldwide.

Source: Google Trends

Which leads to the main points that should leave anyone concerned. The company, since its IPO, has failed to maintain margins. While there were a few upticks, we have yet to see any stabilization.

The last concerning financial point is the ongoing shareholder dilution with ongoing share issuances.

Beyond The Numbers

So far, GoPro has shown that they are a great company, they produce great products, but unfortunately due to their own and others' actions, has been a horrible investment. It all boils down to the concept we discussed up front, the disconnect between the hyped up version of what they were supposed to be, and reality.

So what's reality?

GoPro is the leader in the retail action camera market. The big question mark is how much more can they grab? After all, by their own account they already own the vast majority of the market.

Source: GoPro Earnings Release

So thus the question... when you control 97% of the dollar share and 87% of the unit share in the United States... what's the upside?

I do believe the next quarter or two should be great for GoPro for the simple reason that they released an action camera that moved the needle, bringing 4k video in 60 frames per second and live streaming. More than that, the Hero 7 Black also fixed ongoing nagging issues such as poor audio quality.

Are these features enough to get someone who did not want an action camera to buy one?

No, I don't believe so. BUT... are these features enough for me to go and upgrade one or two of my existing action cameras? Probably.

Thus why I believe GoPro is a niche company producing a niche product in a market they already own.

There are of course some concerns on the product that may open the doors to competitors, namely users complaining about the build quality, poor battery life and overheating.

While the GoPro Hero7 Black has an average 3.8 out of 5 stars, more than 21% of the reviews are 1 star. That's a problem that does need to be addressed.

Source: Amazon

I believe GoPro's bread and butter is to be that niche provider, making the BEST action cameras in that $300 to $500 price point.

Investors may not want to hear it. After all, the hope of every investor is to grow, grow, grow, but GoPro is simply not equipped to go beyond this category. One nearly needs to look at drones or even the feedback to their lower priced cameras - here.

Going outside of the action camera market to travel cameras would be an even bigger battle as carving out a small niche there would cost billions more. After all, why would a photographer who is already invested in the Nikon, Canon, Sony, Pentax, Panasonic, or Fuji ecosystem now drop everything and pick up a GoPro?

The bright spot is however that GoPro is starting to do a better job of monetizing their existing users and converting them from one time buyers of cameras, to an ongoing customer of their SaaS (Software as a Service) offering.

The GoPro Plus service is a $4.99 monthly membership that gives GoPro customers unlimited cloud storage, protection and discounts on accessories.

This service can absolutely make the revenues more predictable and drive future growth, however we will have to see what level of adoption they can get for this. I will absolutely be watching this in the future.

Bottom Line

After more than doubling my money on GoPro on the IPO, I was hoping that it would be yet another opportunity to profit again.

Unfortunately, after going through the company's recent earnings results, operational metrics and the broader market segment, I do not see any catalysts that would help the company significantly grow profitability in their current structure. I am however cautiously optimistic to see how GoPro Plus grows.

At the end of the day though, while I may end up upgrading my old action cam, it's nowhere near enough to make me an investor.

I hope this was helpful and I look forward to your questions and comments!

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