GoPro Inc. (GPRO, Financial), the leading manufacturer of action cameras, pulled off a surprising second quarter, beating revenue and earnings consensus.
The mountable-camera company managed to post revenue of $283 billion during the quarter, beating the analyst consensus by about $12.77 million. It posted a net loss of 15 cents a share, which was better than expectations of 22 cents from the Street.
For the third quarter, GoPro is guiding for midpoint revenue of $270 million, mostly in line with the analyst consensus of $271.4 million. For the full year, the management expects revenue to reach $1.14, conforming to the full-year consensus of analysts.
The market was apparently satisfied with the results as the stock is up an astonishing 17% since the company reported after the bell Friday.
What drove the stock?
Although the company reported a net loss, better-than-expected results and rosy guidance might have catalyzed the stock price.
“GoPro will be profitable in the second half of 2018. And importantly, our plan is to exit the year with an improved margin profile we believe will translate into a profitable 2019,” said Nicholas Woodman, GoPro's CEO, in an earnings call.
The management also noted that sell-through will be around 3 million units during the second half of 2018, up 25% year-over-year. This might have contributed to the post-earnings rally. Moreover, there was a high pre-earnings short interest in the stock, and a short-squeeze might have also played a part.
Regardless, long-term prospects seem rather weak, and this rally might prove to be a short-term tailwind for GoPro investors.
Growth is almost absent
It is evident from the second quarter results that the California-based camera company is finding it difficult to rejuvenate growth. Although GoPro beat analysts’ consensus for the quarter, revenue declined 4.6% year-over-year. Sequentially, revenue grew around 39.7%, but that was mostly a cyclical affair. For the full year of 2018, GoPro is looking at a 3.3% year-over-year decline in revenue.
It can be seen in the chart above that the growth is slowing down. During the last two quarters, GoPro’s revenue shriveled on a year-over-over basis. All in all, it’s growing increasingly apparent that GoPro is losing its growth prowess.
There is not much of an addressable market
GoPro noticeably uses phrases such as “leading camera company” and “positioned at No. 1” in its PR releases while ignoring to talk about the total addressable market. For instance, the company stated the following phrases in its prepared remarks for the second quarter earnings (bold added for emphasis).
"According to the NPD Group, in the second quarter, GoPro held 97% of the action camera category in the U.S. by dollar volume. And the five top best-selling action cameras in the U.S. were all GoPros. Our spherical camera fusion even with limited distribution has captured roughly 48% of the U.S. market on a dollar basis. In both Europe and Asia according to GfK, GoPro held four of the top five selling action cameras in the second quarter. In Japan, GoPro's share of the action camera market increased to 58% by unit volume.”
The company is choosing to talk about its relative position in the market, rather than the total addressable market. The relative position is certainly important, but so is the size of total market. As GoPro is serving a niche market of hobbyists and professionals rather than the mass market, it’s very important to know the total addressable market.
The total market for action cameras is being hampered by smartphones with high definition picture and video capability. According to TechNavio, the action camera market is expected to reach $5.8 billion by 2021.
With many players in the market including Drift Innovation, Gramin and Sony, GoPro will have to fight hard to increase its revenue in a market that his limited potential. Note that GoPro is expected to report $1.14 billion in revenue during 2018, making up around 50% of the total addressable market in 2018.
GoPro is lagging behind the industry
Not only there is a limited addressable market, GoPro is lagging behind the industry in terms of growth. TechNavio forecasts about 15% cumulative annual growth (CAGR) in the action camera market from 2017 to 2021. Another rather bullish report indicates 23% CAGR in the top line of action camera players until 2023. In stark contrast, analysts are forecasting a mere 3% growth in GoPro’s revenue during 2019. In short, it seems that GoPro is at risk of losing market share to other key players, which will limit the company from capitalizing on the total addressable market of the industry.
Takeaways
Although GoPro has beaten the street and provided reassuring guidance, the company entails secular long-term risks including limited addressable market and declining growth despite healthy industry growth forecasts.
Disclosure: I have no position in any stocks mentioned and no plans to initiate any positions in the next 72 hours.
