GoPro’s Dreams of Grandeur Are Fading
When a company sells products that are not revolutionary and offer little barriers to entry, the risk of rival products generally will surface. GoPro Inc (NASDAQ:GPRO) is one such company that debuted with spectacular fanfare but is now facing wrath from investors as they rush to liquidate GPRO stock on rising uncertainties.
GPRO stock has plummeted to less than half of its 52-week high, and it is struggling to reinvent itself in what is an extremely competitive landscape.
In previous discussions regarding GoPro stock, my view was that the company had a great little action-video-recording product, but it also needed to expand its business due to the threat of cheaper knockoffs emerging out of China.
The problem with GPRO stock is that the company is essentially a one-product company with minimal barriers to entry. In economics, these types of businesses are high-risk.
As a consumer, you can easily find GoPro knockoffs for a small fraction of the price that GPRO cameras cost. There are also cheap copies of accessories for GoPro cameras, so there is essentially no place to hide.
The recent third quarter was a disaster for GoPro after the money-losing company lost an adjusted $0.60 per diluted share, which was a whopping $0.25, (71.4%) worse than the consensus.
Armed with about $225.0 million ($1.60 per share) in cash, the situation is precarious, as GoPro continues to lose money and is expected to do so for 2016 and 2017.
If GoPro cannot reverse its fortunes soon, the company will inevitably face a cash crunch and it will need to raise more capital.
The company just announced that it would be axing 15% of its workforce to cut its cash-burn rate.
Yet, what would make me nervous is the lack of execution at GoPro.
Chart courtesy of StockCharts.com
My Bear Case for GPRO Stock
Much-heralded CEO pickup, Tony Bates, who served as an executive VP at Microsoft Corporation (NASDAQ:MSFT) and as a CEO of Skype Technologies, is also running for the exits after announcing he would be leaving by the year-end.
Now GoPro must find a new leader who has vision and can turn the battered ship around.
It will not be easy. GoPro is shutting down its entertainment unit, which at one time was expected to be a massive success and interest with its library of action videos.
And to heap onto the pile, GoPro is facing technical problems with its drone unit, which again was expected to generate massive interest and open up new revenue streams. While GoPro is staying with its drone business, the problem is the rising competition from much cheaper drone-makers, including the China-based DJI.
The reality is that, while GoPro products are technologically superior to the cheaper knockoffs, the difference may be perceived by consumers as too little to justify the premium cost.
Eventually, unless GoPro cuts its selling prices, the company will see its market share erode. And, if GoPro cuts prices, this will eat into the company’s margins, which is something that GoPro stock cannot afford, given its losses and limited resources.
It will not be easy for GoPro. I initially thought that a takeover would be the best-case outcome for GPRO stock, but even this doesn’t look realistic.
Maybe the next GoPro CEO could offer some hope; otherwise, it could be lights out.