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GoPro, Oh No!

|Includes: GoPro (GPRO)

-GoPro has been smashed with the absence of new products

-Holiday season is forecasted to continue disappointing investors

-The release of the GoPro 5 and GoPro Karma provide hope

In anticipation of a few upcoming trips, including white water rafting, I searched the internet for the best action camera option. I settled on an entry level GoPro, and after recently purchasing the camera I began to wonder if things had gotten any better at the company which I advised investors to steer clear of back in March:

"Though GoPro is an exciting young company, I currently do not see them maintaining long-term growth and success. I feel a wide selection of quality models will provide significant competition, similar to the inception of digital cameras. If GoPro can continue to differentiate their cameras and channel from others they will be able to build their brand as a premium, but for now, a large amount of companies are starting to cut into profits and stand in their way."

Down over 55% since writing, the company has continued to feel the pain since highs shortly following their IPO. Though it is important not to let personal bias influence investment decisions, my research discovered a mass amount of action cameras, and GoPros listed at much lower prices than on their own site. The recent negativity can be shown by GoPro slashing the price of their new model the Hero Session from $399 to $299 to recently a $199 selling point. Some say this symbolizes fading demand for the brand and new products as a whole. This seems extreme as the Hero Session, a smaller version of a small camera without new features, simply didn't provide any motivation for buyers.

Moving into fundamental analysis, the stock appears cheap on the surface trading at a little over 13 times earnings at writing, and sporting a debt free balance sheet. But, the valuation becomes understandable upon seeing flat earnings growth, and earnings estimates all over the map for 2016 EPS. Unsurprisingly, over 41% of float is sold short echoing the company's recent performance.

In the Q3 earnings call Nicholas Woodman talked about how he felt the company under spent on advertising in Q3 stating that GoPro would be "taking a more aggressive advertising approach in the fourth quarter, which includes a return to television following a one-year hiatus." Those who thought the holiday season would bring joy and cheer to GoPro again were sadly mistaken so far according to Morgan Stanley analyst Katy Huberty. Her research found GoPro sales may come in below company targets based on slow rates of inventory decline. This report is extremely disappointing following GoPro's increased spending on advertising. The theme of the Q3 earnings call as a whole was that GoPro had made mistakes, but they had taken steps to correct them, now it seems that might not be the case.

Furthermore, the recent Q4 earnings guidelines from semiconductor producer and GoPro's biggest supplier Ambarella continues to paint a bleak picture. Ambarella noted that a weakened wearable camera market especially in the U.S. is its biggest problem for growth. The wearable camera market's growth is Go Pro's biggest problem. GoPro's concept was met with high interest, but that initial demand surge covered most of their market. This initial burst has left GoPro with a saturated market with lukewarm demand.

With GoPro's current market under duress, it is no surprise they are looking to enter the recently booming drone market. 700,000 drones are projected to ship in the United States during 2015, which is a 63 percent rise from 2014, according to the Consumer Electronics Association. The market is certainly big enough to have an impact on GoPro's bottom line, top consumer drone maker DJI did $500 million in sales during 2014 and projected 2015 sales of $1 billion according to venture capitalist firms. GoPro is a household name which should help them penetrate the market, but investors would be bold to bet on the company simply for a product they have released an uniforming hype video about, GoPro Karma.

Though all the aforementioned negatives are true for the company, a contrarian play becomes evident in early 2016. Given the company's expected poor holiday quarter, share price should remain at beaten down levels or continue to fall. The release of GoPro Karma should be met with much fanfare as the king of action cameras releases their own drone. Though this single drone may not provide significant initial revenue, it could open the door for GoPro to a growing industry that fits with their current product.

GoPro is also planning to release the GoPro 5 (originally scheduled for debut before the holiday season) in early 2016 and is reported to have multiple new features highlighted by dual lenses for 3D photos and an immensely improved 24 hour charge from the devices weakest point, a 2 hour charging capacity. Though delaying the GoPro 5 has muted GoPro's holiday season, getting the camera right is vital for GoPro's continued success. If this release does indeed carry the reported features, it will motivate current GoPro owners to upgrade, and new customers to enter the space. The GoPro 5 has the potential to kick start the aforementioned stalling demand for action cameras.

Though their are new action cameras coming to the market, GoPro still remains the top brand due to their quality, GoPro network, and editing software. Ultimately I would not bet on GoPro going either way right now, but if shares continue to fall, investing in the company before exciting new product releases could provide significant upside with minimal risk.

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