Shares of GoPro (NASDAQ:GPRO) tumbled in early October after new product announcements from the action camera maker were overshadowed by news of production delays and a sharp second-half 2019 guidance cut. Specifically, although GoPro announced the new HERO8 Black and HERO MAX cameras, management also announced that a late stage production delay would push back HERO8 Black shipments.
This production delay forced management to cut it second-half 2019 revenue, margin, and profit guides. GPRO stock fell about 20% on the news. Shares now trade hands narrowly above $4 — just a few dimes above all time lows.
This is where GoPro stock deserves to trade today. For several years now, there have been murmurs of a long overdue GoPro turnaround. But, that turnaround has never arrived. The reality is that it will never arrive. GoPro is a niche consumer hardware company with low margins, a small addressable market, limited demand, and muted profit growth prospects.
Given that reality, at best, shares are worth around $5 today. At worst, they could be worth nothing. As such, GPRO stock deserves to trade below $5. Any rallies above that important level should be faded.
GoPro’s Fundamentals Aren’t Great
In a nutshell, the fundamentals underlying GPRO stock aren’t great, and don’t really inspire much confidence when it comes to long-term profit growth prospects.
GoPro sells action cameras. Here’s the thing about action cameras. Most consumers don’t need them. Most consumers don’t do action and adventure things consistently enough to shell out several hundred bucks for a camera to record those activities. That’s especially true considering that, for most of us, a smartphone will do the job just fine.
Further, for those who do participate in action/adventure things AND want to record them on something other than a smartphone, they do buy an action camera. But, they only do so once every few years because these cameras are durable and don’t get frequent enough use to upgrade any sooner.
Thus, as an action camera company, GoPro is selling to a niche audience wherein potential buyers only buy once every few years. That’s not a great business cycle. Especially when the cameras don’t sell for that much (a few hundred bucks), and have fairly low gross margins (between 30% and 40%). Add in the fact that there’s a lot of competition in this market — DJI, Sony (NYSE:SNE), and YI, among others — so GoPro has to spend a fair amount on sales and marketing to drive sales, and you’re left with a permanently low-growth, low-margin business.
Those aren’t great fundamentals. Ultimately, those fundamentals support the fact that this company will never produce that big of a profit. That simultaneously implies that GoPro stock will never get that big of a price tag.
GoPro Stock Isn’t Worth More Than $5
All things considered, GoPro stock isn’t worth more than $5 today.
Here’s the logic. The action camera market isn’t growing. GoPro isn’t expanding share in that stagnant market. As such, over the next several years, GoPro’s revenues should grow with inflation and price hikes. But, there won’t be much unit growth. Thus, big picture, GoPro projects as a low single digit revenue grower at best.
Meanwhile, gross margins are improving today. But, that’s because they are bouncing back from depressed 2018 levels. After this year, gross margins will likely flatten out because GoPro doesn’t have much wiggle room in terms of margin additive price hikes. Further on down the income statement, GoPro will likely continue to pull costs out of the system. But, GoPro will run into some cost-cutting resistance here because they’ve already done tremendous slimming, and the company still needs to spend a fair amount on marketing to remain relevant in a crowded market.
GoPro projects as a low single-digit revenue grower with limited upside margin drivers. My modeling suggests that, in a best case scenario, GoPro’s EPS winds up at 50 cents by fiscal 2025. Based on a market average 16-times forward earnings multiple and a 10% discount rate, that equates to a 2019 price target for GPRO stock of under $5.
Bottom Line on GPRO Stock
In a best case scenario, GPRO stock is worth $5 today. In a worst case scenario, this company will continue to burn through cash until it’s all gone, meaning the stock will ultimately wind up worthless.
Given those two potential outcomes, GoPro stock doesn’t look very compelling at $4 and change.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.