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GoPro Likely to Turn Around in Q3, Product Launches on Track

Zacks

Late last week, GoPro, Inc. GPRO raised its outlook for the current quarter, emphasizing that it’s on track to deliver profits, after a long trail of posting quarterly earnings in the red (which was broken only once over the last seven quarters). Investors were already feeling hopeful about GoPro’sprospects, after the company reported better-than-expected results for second-quarter 2017 recently.

Last Thursday, the action camera maker said it expects to be profitable on an adjusted basis in third-quarter 2017, which catapulted its shares up nearly 17%. Its shares are now back in the double digits, which was not the case for the better part of a year.

In fact, GoPro’s shares have appreciated 20.3% in the past three months, outperforming the industry average of 7.4%. The analyst community has also been showing favor toward the stock in recent times, with estimates being revised north sharply. The Zacks Consensus Estimate for 2017 earnings narrowed from a loss of 16 cents to a loss of 3 cents per share over the past 60 days, led by three upward revisions versus one downward.


Facts & Figures

Per the latest information, GoPro now anticipates revenues and gross margin for the third quarter to come in at the higher end of its previous guidance. Just last month, the company released the said outlook, concurrent with its second-quarter results, which called for third-quarter revenues in the range of $290-$310 million, with gross margin coming in between 36-38%.

GoPro had earlier expected to report a loss of 1-11 cents in the third quarter on an adjusted basis.

The company also affirmed that its plans to launch the Hero 6 (the latest edition of its flagship action cameras) and the new Fusion 360 camera by the holiday season were perfectly on track.

GoPro will likely officially release its third-quarter results in early November. But the quarter ends in a few weeks (on Sep 30), so it's heartening to know that GoPro has seen enough this quarter to make such a confident forecast.

Focusing Through the Lens

GoPro's cameras might have a massive following among action junkies, but its sales have taken a thorough beating in recent quarters, after a series of missteps.

On the face of it, things seem to have turned around for the better for GoPro, and the stock is showing signs of life too. Still, the company has lost money in six of the last seven quarters, and investors need to dig a little deeper to glean whether the improvement is sustainable.

The action camera market is still grappling with serious demand issues and ever-increasing competition. GoPro's shares have slumped nearly 70% in the last couple of years, as the company grappled with production delays and bungled up product launches, and lost ground to competitors like Sony Corporation SNE, Garmin Ltd. GRMN, and Nikon Corporation NINOY.

In fact, the company is likely on track for its third consecutive year of margin compression, and this does not bode well for its bottom line. In the recently reported second-quarter results, its gross margins contracted a whopping 650 basis points year over year.

Also, GoPro’s inventory levels have been causing serious hiccups over the last couple of years. Excessive inventory is not good for either new releases or retailers. So, management recently decided to revert to its old system of limiting releases, regardless of whether demand exceeds supply. This sets up the company for leaner channels and better inventory levels, and bodes well for GoPro’s upcoming product launches as well.

Also, the fact remains that sales really have rebounded after the release of HERO5 in the fourth quarter of last year. If the market was truly saturated or the company was losing market share amid such intense competition, GoPro would have seen a persistent decline in sales.

The upcoming holiday season will serve as the true test for the company, and will determine whether GoPro's management will be able to right the ship and return the company to profitability. Notably, this will be the first holiday season in which the Karma Drone will be fully available, after the recall disaster last season.

In order to restore investor confidence, GoPro will need a series of strong quarters — and this means no operational glitches, sub-par guidance, production delays or messed-up product roll outs.

We currently have a Zacks Rank #3 (Hold) on GoPro.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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