GoPro Inc (NASDAQ:GPRO) is a picture of an uphill battle. The company just reported Q3 numbers, and it was another disappointing earnings event thanks to another net loss and a big “miss” on forward guidance.
Our view on the stock is rooted in the fact that the entire company is predicated on sales of a largely commoditized piece of hardware. You rarely see tech hardware sales earn more than 10x in trading valuations in the public equities markets.
GoPro Inc (NASDAQ:GPRO) has long attempted to suggest that it is somehow special and outside of this standard. When the company first went public, this complaint was raised by several analysts given the IPO valuation coming in well above that type of range.
For a short period, the company actually attempted to suggest it was a media brand, where the hardware was just a supportive coproduct.
But that quickly dissolved, leading to a collapse in the stock that featured a 90% decline in just a bit more than a year’s time. Nowadays, the company is chopping along as a commodity hardware producer with a gimmicky brand identity, but relatively indistinguishable products.
That takes us to the company’s Q3 data, which was actually solidly better than expected. GPRO reported a ($0.04) loss in Q3, but that loss was narrower than expected. Also, revenue fell 13.3% year/year to $285.9 mln, but that decline versus the prior year also equated to a 1% increase sequentially from Q2; a substantial sequential decline had been expected.
However, looking ahead to Q4, management indicated on the conference call that it expects Q4 non-GAAP EPS of $0.21-0.31 and revenue of $360-380 mln.
Both numbers are well below market expectations. That’s of extra importance given that we are talking about the holiday guidance.
The life cycle of the “GoPro cameras are special, trendy, cool things and not just nameless commodity hardware!” thesis can probably be traced to how they fare as holiday gift items.
As such, Q4 has been the company’s biggest revenue win every year since it hit the public market. And it will be this year as well. However, it won’t be anywhere near where analysts had it pegged. Presuming those estimates were likely based more on extrapolating a common relationship between Q4 and Q’s 1-3, the company’s guide below them suggests an uncommon falter during holiday sales.
While the company has attempted to frame that shift in terms of industry pressure to fill a promotional goods niche (lower margins, higher volume) and some timing issues with accounting for large sale deals (pulling forward Q4 expected sales into Q3, boosting Q3 numbers and cutting into Q4 guidance), the size of the miss for Q4 is too large to be accounted for with those explanatory devices.
We believe that is why the stock was so badly beaten up in response.
Often, when we see this type of faltering after a particular brand or product has been working at holiday time, we are dealing with a “back into the pack” type of dynamic. Even with its new HERO7 being touted so heavily and achieving success to such fanfare at the company, the longer term picture is going to be more and more difficult given that most people’s smartphones will likely be competitive in a short period of time, not to mention numerous other comparable products already on the market.
In other words, consumers are perhaps beginning to differentiate less and less between a “GoPro” and any other branded version of a mountable, wearable “action” camera. And the market response may be saying that this trend will inevitably accelerate indefinitely over time.
Since the company isn’t even profitable yet, when it finally does start to beat breakevens, the multiple on EPS is probably not going to be outside of the standard 10xE pricing for shares that we typically see.
Long story short, invested capital in the company’s equity will likely have to take the stairs instead of the elevator if it is going to grow.
View From Above
GoPro Inc (NASDAQ:GPRO) trumpets itself as a company that develops and sells cameras, and mountable and wearable accessories in the United States and internationally.
The company offers HERO5 and HERO6, which are cloud-connected line of cameras; Fusion, a waterproof spherical camera; GoPro Plus, a cloud-based storage solution that enables subscribers to access, edit, and share content; Quik, a mobile editing app, as well as desktop app for editing options for power users; GoPro App, a mobile app that allows users to preview and play back photos and videos, control GoPro cameras, and share content; and Karma Grip, a handheld or body-mountable camera stabilizer that capture zero-shake smooth video.
It also offers mounts and accessories comprising equipment-based mounts consisting of helmet, handlebar, roll bar, and tripod mounts that enable consumers to wear the mount on their bodies, such as wrist housings, chest harnesses, and head straps. GoPro, Inc. markets and sells its products through retailers and wholesale distributors, as well as through its Website.
The company was formerly known as Woodman Labs, Inc. and changed its name to GoPro, Inc. in February 2014. GoPro, Inc. was founded in 2004 and is headquartered in San Mateo, California.
GoPro Inc (NASDAQ:GPRO) managed to rope in revenues totaling $282.7M in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of -4.7%, as compared to year-ago data in comparable terms. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($139.8M against $255.5M, respectively).