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GoPro (GPRO) Sees a Rough Start to 2018, Catalysts Limited


Investors who stuck through thick and thin for GoPro, Inc GPRO have had their faith badly shaken lately. The stock has lost a whopping 46.5% in the past six months against the industry’s rally of 22.2%.

Huge, multiple layoffs, heavy discounting, decaying fundamentals and a dismal track record of missing targets have hurt GoPro’s brand image in the market. Not surprisingly, we have a Zacks Rank #5 (Strong Sell) on GoPro.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

GoPro’s revenues have been highly volatile in the past three years, and have largely followed a downward trend, particularly in recent months. In fourth-quarter 2017 results, the top line took a severe hit (down 38.1% year over year) due to sluggish demand for GoPro’s Hero gadgets, and discounting of the Karma drones and Hero cameras during the holiday season.The company is anticipating revenues to contract further in the first half of 2018, as it clears inventory from sales channels.

Bad Karma

The company is shutting its drone business. Not a long while ago, GoPro had hoped Karma would help revive the company’s fortunes and stoke growth for the beleaguered action camera company. Karma witnessed a roller-coaster ride, punctuated mostly by lows rather than highs, thanks to problems like production delays and recall of 2,500 units due to a battery issue.

Karma was, no doubt, facing mounting margin challenges in a tremendously competitive aerial market, dominated by the likes of DJI Technology and AeroVironment. A hostile regulatory environment in Europe and the United States further reduced Karma’s total addressable market and made its future untenable.

The Bottom Line

Coming to the bottom line, GoPro has actually lost money in seven of the last 10 quarters. The company reported an adjusted net loss of 30 cents per share in the fourth quarter against earnings of 29 cents in the year-ago quarter. The bottom line also missed the Zacks Consensus Estimate of a loss of 10 cents.

Recently, GoPro has been aggressively cutting costs through a series of layoffs. In 2017, the company conducted two rounds of layoffs, slashing 7% and 15% of its workforce in January and November, respectively. Last month, the company announced another 20% layoff of its workforce. After the latest round, GoPro will end up with less than 1,000 employees.The company is targeting to limit operating expenses to less than $400 million in 2018 compared with $476 million incurred in 2017. This is likely to aid GoPro’s attempts to revive bottom line. However, the company already expects to book a net loss in 2018.

What Went Wrong?

According to the company’s founder and CEO Nick Woodman, the blame for GoPro’s third consecutive holiday season shortfall lay at the door of poor pricing decisions on its flagship cameras. This suspiciously sounds like the company is trying to downplay weak demand for its action cameras. At the very least, it shows that that for all its brand recognition, GoPro doesn’t really have any pricing power.

In 2017, GoPro slashed prices for the Hero 5 Black and Hero 5 Session cameras. It also cut the price of its latest camera, HERO 6 Black, to $399 from $499. The constrained demand and price cuts are likely to affect the top line in the upcoming quarters.

In light of the dismal developments, the analysts’ community has become bearish on the stock, with estimates plunging headlong in the past 60 days. For 2018, the Zacks Consensus Estimate nosedived from earnings of 44 cents per share to a loss of 37 cents over the past couple of months, highlighting acutely negative expectations from the company.

GoPro, Inc. Price, Consensus and EPS Surprise

Tough Road Back to Profitability

Despite multiple challenges, GoPro still holds about 80% of the action camera market in the United States. In the fourth quarter, its unit sales grew 28% and soared 96% year over year in China and Japan, respectively. We are optimistic about the company’s subscription offerings.

CEO Nicholas Woodman also expects that the cameras, to be introduced in the second half of 2018, will drive margin expansion. Thus, investors should watch margin trends as the year unfolds to see if the company can deliver on its commitment.

Woodman is committed to revive the company’s business in 2018 and outlined strong restructuring measures to achieve the same. For now, it appears that investors don’t believe that GoPro’s initiatives can outweigh soft demand for its only real products, particularly as it exits a potential major revenue-generating business.

An Easier Way?

Amid severe operational issues, multiple layoffs and decaying fundamentals, GoPro has already lost significant ground to competitors like Sony Corporation SNE, Garmin Ltd. GRMN and Nikon Corporation NINOY. Further, GAAP losses might result in additional cash burn, thus weakening the company's balance sheet even more.

There is no easy answer to GoPro's troubles. If the company doesn’t turn its performance around soon, GoPro may have to sell itself. In fact, there were some reports recently that indicated that GoPro hired banker JP Morgan Chase to advise on a potential sale.

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