Ever since the decline of GoPro (GPRO, Financial)'s camera business, it has been looking for ways to diversify its revenue. The company decided to enter the drone market; however, it looks like its plans are likely to fail.
Recently, the Federal Aviation Administration and Department of Transportation publicized some brutally restrictive drone rules. According to the rules, drones cannot weigh over 55 pounds and have to linger in a pilot's vision.It is also compulsory that pilots have a remote pilot certificate (RPC) and a minimum age of 16.
It is clear that these are very restrictive rules. They will probably ruin the strategies of major companies such as Wal-Mart (WMT), Amazon (AMZN, Financial), etc., as they plan to use drones for delivery purposes to customers who want their products to be delivered quickly. The line of sight rule, however, has rendered the technology useless for commercial purposes.
As a matter of fact, drones are meant for a commercial product, and drones were likely the last chance for GoPro to move forward. At present, the company has built a cost structure that is basically unmanageable after that its inferred infinite growth out into the prospect.
What is next?
GoPro’s management believes that its cameras require support from a software network to be successful. Moreover, its latest idea is media editing applications, as it recently purchased two applications, Quik and Splice, for around $105 million. With this step, the company anticipates increasing demand for cameras.
As a result, the purchases do not make any sense from a financial point of view. GoPro spent $105 million on two non-income-producing resources and anticipated the ongoing costs. Both purchases, however, were either closed headed for the end of the first quarter or just after. The first quarter income statement did not reveal the complete influence of surplus costs. Therefore, it is likely that SG&A expenses will surge moving onward.
Conclusion
GoPro is still struggling to curb the trend of declining sales, and the recent drone rules will further damage its diversification efforts. Although GoPro has fallen considerably, the stock still looks overvalued.
GoPro has considerable downside, especially heading into earnings season, and I would stay away from the stock. GoPro’s revenue will continue declining, thereby pushing the shares lower.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
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