While the current earnings season has been good for several struggling companies, GoPro (GPRO, Financial) will likely head lower after reporting another bad quarter. There are several reasons to believe GoPro is a terrible investment and despite its stunning fall, the stock still has more room to head lower.
Continuously Going Downward
GoPro is off to a terrible start this year, as analysts project the company’s sales to drop 17% this year, down from 16% and 41% growth in 2015 and 2014, respectively. At present, the company predicts a decline in the range of 6% to 9%, primarily depending on the performance of Hero 5 and Karma drone throughout its holiday quarter.
However, to reach that range, it is mandatory for the company’s two devices to boost its fourth quarter revenue by 37% to 83% yearly, which would be analogous to its sales growth in the fourth quarter of 2014, when the company began selling its Hero 4 Black cameras.
With time, the market has changed intensely since the release of Hero 4 devices, as many small and huge players have entered the market with different and innovative ideas, causing price expectations to leap. The company’s non-GAAP operating margins dropped 340 points y-o-y to 41.7% the previous year. Further, it declined 1,220 basis points to 33% throughout the first quarter.
As a consequence, the company does not remain profitable on a GAAP as well as non-GAAP basis. Apart from this, consensus anticipates that the company’s condition will not likely improve over the next two years.
A Threat From Yi technology
Yi technology could be considered the most significant competitor of GoPro, as Yi’s 4K action cameras uses the latest chipset, A9SE, manufactured by Ambarella whereas GoPro’s Hero devices uses Ambarella's A9 processor. However, the significant advantage for Yi is its pricing strategy, because its products are less expensive compared to GoPro’s products.
In addition, Yi’s latest device, the Yi 4K Action Camera 2 comprises the same Sony image sensor as well as Ambarella chipset that are used in GoPro’s Hero 4 Black, which is available for around $500. Yi’s camera also comprises a LCD touch screen, along with a bigger battery.
Given that competitors are now offering better products for cheaper price and that GoPro’s diversification efforts have failed, I think the stock is headed lower.
Conclusion
Due to the reasons mentioned above, I think investors should sell GoPro. I expect the company to report a very weak quarter, thereby sending shares to single-digits. Traders can consider buying out options to profit from the upcoming report.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
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