GPRO Stock: Will Earnings Put a Bottom Under GoPro, Inc.?

GPRO StockHere’s What GoPro Stockholders Should Look Out for

It’s no secret that GoPro, Inc. (NASDAQ:GPRO) has hit a rough patch this year, as the GPRO stock price has halved in value since January and drawn no end to critics predicting the company’s demise.

GoPro is set to announce its third quarter 2015 earnings report on Wednesday, October 28th, in what is widely seen as a make-or-break event for the durable camera manufacturer. Here’s what investors should be looking for.

What Happened to GPRO Stock?

GoPro’s stock price nosedived in September, brought on by both slumping sales volumes for its HERO4 Session and bearish outlooks by leading analysts. (Source: “Here’s Why GoPro’s Stock is Dropping So Much,” Fortune, October 10, 2015.) With holiday shopping season about to kick into gear, GoPro faces the difficult task of redeeming itself and proving it’s not, as many have liked to insinuate, another one-hot wonder like BlackBerry.

But despite these negative sentiments, the reality of GoPro’s market position is surprisingly positive.

Let’s talk about GoPro’s growth forecast and guidance. According to the market analysts, revenue for the third quarter is estimated to be in the range of $438 million, which would represent a 55% growth year-on-year. (Source: “Wall Street’s Week Ahead, Part 2: Paypal Holdings Inc (PYPL), GoPro Inc (GPRO), and Gilead Sciences, Inc. (GILD),” Smarter Analyst, October 25, 2015.) As for earnings per share, you can expect a rise of approximately 142%, or $0.29 a share. (Source: NASDAQ, last accessed October 26, 2015.) GoPro itself has released similar estimates, and it remains to be seen whether reality will match up.

Now, what should interest investors more than these figures is fourth-quarter guidance. GoPro revenue for the fourth quarter of 2014 surged by 75% year-on-year, on the back of a 267% net income explosion brought on by consumer demand for HERO4 and basic HERO cameras.

GoPro has attempted to apply the same formula this year, announcing new cameras in hopes that it can ride a wave of demand into the holiday shopping season. The action camera manufacturer has also beefed up its lineup this year, with three new cameras being offered at discounted prices. The HERO4 and LCD-HERO+ has been on sale for $400.00 since the first half of 2015, and the more basic HERO+ recently came out at $200.00.

Now, because GoPro has decided to shift its camera offerings around compared to 2014, a straightforward comparison does not tell us much. Various market analysts have forecasted GoPro’s sale numbers to soar by nine percent year-on-year in the fourth quarter of 2015, while earnings will fall by about 17%. (Source: Yahoo Finance, last accessed October 26, 2015.) A GPRO stock price rebound may occur if the company’s guidance surpasses those bearish forecasts.

Another challenge for GoPro will be to maintain its margin growth, which is critical if the company wishes to squash fears over its price reductions. The company announced gross margins in the range of 46.6%, which represents a rise from 45.2% in the first quarter of 2015, and an annual figure of 42.2% in 2014.

In order to claim that margins have shown an improvement, GoPro needs to touch the higher end of its own gross margin forecast, which is about 46% for the third quarter according to CEO Jack Lazar. (Source: “Edited Transcript of GPRO earnings conference call or presentation,” Yahoo Finance, July 22, 2015.) If the company does not live up to these expectations, critics could point at slumping sales being the result of GoPro’s cheaper cameras outselling its more expensive ones, and adding further bearish sentiment to the GPRO stock price. GoPro has been adamant on the fact that its higher-priced cameras are accountting for about half its revenue.

And what if the company does exceed the margin forecasts? Well, it will significantly reduce fears over GoPro’s cheaper cameras’ lack of profitability, which has been a sour point in recent months.

GoPro is Doing Remarkably Well on the International Stage

GoPro reported international sales growth in the range of 126% in the second quarter of 2015, driven in large part by a 183% annual growth rate in Asia. (Source: “GoPro’s CEO Has lost $1.4 billion this year,” Bloomberg, September 28, 2015.) The Asia-Pacific region in fact accounted for nearly one-fifth of GoPro’s overall revenue. (Source: “GoPro Increased Its Revenue and Geographical Reach,” Market Realist, August 10, 2015.) China especially has become one of the company’s top markets, while sales volumes in Africa, the Middle East, and Europe doubled to make up about one-third of revenue.

Compare these figures to GoPro’s North American sales, which saw only a comparatively moderate rise of 39% to make up about 50% of overall revenue.

It becomes obvious then that we are being more than a little self-focused, and ignoring the fact that GoPro’s market share is surging from a global perspective. The tricky thing for the company will be to ensure that international sales continue to rise dramatically, and hope that this will at least partly make up for slumping sales growth in the U.S. and Canada. International growth will also have the benefit of battling emerging competitors, with several low-priced clones already appearing on Chinese markets, as well as more mainstream competition. (Source: Wall Street Journal, September 11, 2015.)

What investors and analysts alike need to hear right now is a more articulated future strategy from GoPro itself. If the company wishes to survive and thrive, it will have to evolve past the durable camera game and expand more on its plans to become a media platform. If GoPro can better explain how it plans to connect its social media, picture and video sharing, and upcoming cloud platform services to the manufacturing of action adventures cameras, then it will have the winning formula to succeed.

The company is also leaving investors hanging by keeping a tight lid on the development of consumer drones, although the expected regulatory restrictions may prove to dampen sales enthusiasm for aerial platforms.

So What’s the Bottom Line on the GoPro Stock Price?

The GPRO stock price is essentially undervalued at the moment. And although the argument could be made that this is a surging company with a great financial position, its stock price is highly unstable for the moment. The wise investor might have reason to take pause and analyze the stock for what it is: a volatile investment with high upside potential if it manages to surpass analysts’ expectations for its earnings report.

Lets see how this all plays out on Wednesday.

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