GoPro Inc (NASDAQ:GPRO)’s Near-Term Is Blurred, But Don’t Touch That Dial

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GoPro Inc (NASDAQ:GPRO) presents itself as a provider of wearable and mountable capture devices, which are best known as action cameras. The GoPro brand is a big deal in the point-of-view (POV) camera space. In addition to cameras, the company also renders free editing software for desktop and mobile platforms. GoPro’s line of capture devices go by the name HERO, with HERO+ LCD and HERO4 Sessions being among the latest cameras from the company.

As much as GoPro is big in the action camera scene, the back end of 2015 will likely be challenging for the company. There are at least two factors that explain GoPro’s blurred near-term outlook.

Soft demand for HERO4 Session

Of GoPro Inc (NASDAQ:GPRO)’s new capture devices, HERO4 Sessions is reportedly lagging in sales. GoPro depends on camera sales for most of its revenue and each model is expected to contribute significantly to the overall capture device revenue.

 As such, although HERO4 Silver, HERO4 Black and HERO+ LCD are doing well, the overall topline growth without strong contribution from HERO4 Session will be small. Therefore, if softness in the demand for HERO4 Session persists, the result will be pressure on GoPro’s revenue growth in the near-term, especially in the fourth quarter 2015.

Nevertheless, the management hopes that strong holiday sales will help offset weak demand for the HERO4 Sessions model.

Lack of new products

GoPro does not have new products coming up in the second half of 2015, unlike last year when it introduced some new products in the third quarter. By launching new products in the first half of 2015 instead of the second half of 2015, GoPro has pulled sales forward, and that will result in topline pressure in the latter quarter of 2015 and early 2016.

Postponed benefits

The case for GoPro is that of postponed gains rather than denied gains. In other words, while near-term will likely be challenging for the company partly because of timing of new product releases, the long-term outlook is promising.

GoPro’s product pipeline is rich with new cameras and new categories, such as drones coming in 2016. The company has also lined up software improvements, which also go a long way into bolstering sales of its various capture devices. In addition to being a provider of action cameras, GoPro is also intent to become a media company that also deals with content. The other area that GoPro has shown interest is virtual reality.

Potential topline levers

Customer stickiness:

GoPro Inc (NASDAQ:GPRO) provides almost comprehensive capture solutions that include cameras and accompanying software. The company also enjoys competitive advantages, such as being a first-mover, strong brand recognition and marketing prowess. These factors and many others are promoting customer stickiness to the GoPro brand, which should support more sales in the future.

More topline runway:

GoPro already enjoys a leading brand recognition in the U.S., and the company is expanding abroad to widen its market. The company’s strong position domestically and expansion abroad suggest that there is more room for topline growth.

In the second quarter 2015, the Americas accounted for 50.6% of GoPro’s total sales. The EMEA region accounted for 32.7% of sales, while the APAC region contributed 16.8% of sales in the quarter.

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Ripple effect:

GoPro cameras first appeal to active and influential buyers was that they capture their sporting activities and lifestyles and then share the videos that end up inspiring others to also try to do the same. That ripple effect contributes to a virtuous cycle in which people keep seeking GoPro cameras, thus more sales for the company and greater brand recognition.

Media entity

From being a purely action camera provider, GoPro Inc (NASDAQ:GPRO) is keen to widen its scope as a media entity where it is able to create and distribute original content. Transformation of GoPro into a media company is great in that it expands monetization opportunities for the company. For example, in addition to selling cameras, the company is able to generate incremental revenue through original programming shared on third-party platforms.

Virtual reality: Perhaps related to the media aspect is that GoPro is also keen to tap new growth in the emerging virtual reality space. It has been cited multiple times that virtual reality will be the next big thing after smartphones in the computing world. With such remarks, companies that desire to be part of the new future are activity working on the virtual reality front, and GoPro is not left behind. The company is developing camera rigs that can be used to shoot virtual reality videos.

Balance sheet strength

GoPro has a healthy balance sheet that makes it flexible for the company to take on several projects without fear of running out of cash. At the end of the last quarter (second quarter of 2015), GoPro had $517 million in cash balance, up from $492 million in the previous quarter.

As such, the company can effectively fund its future growth with the existing cash, as well as cash from operations, thus eliminating execution risks.

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Potential risks for GoPro

As much as GoPro Inc (NASDAQ:GPRO) has exciting potential revenue levers, there are also a number of risks to its executions. Here is a look at some of these potential hurdles.

Heavy reliance on single product line – Camera:

GoPro generates nearly 90% of its revenue from the sale of cameras. The risk in that is that unforeseen weakness in the capture devices market can cause enormous adverse impact of the company’s revenues and profits. Moreover, the overreliance on cameras also puts the management in a tight spot because the company has to come up with sought-after capture devices to grow sales.

Competition from new smartphones:

Smartphone vendors like Apple Inc. (NASDAQ:AAPL) are turning to enhanced camera capabilities as part of the features to bolster the competitive advantage to their products. With enhanced camera capabilities in smartphones, some consumers do not see the need for a standalone camera, and that complicates matters for GoPro.

Volatility of discretionary industry:

Cameras are optional items for most people, and that means that people are likely to temper their camera budgets in difficult economic times. As such, adverse economic factors can cause serious disruption to the sale of GoPro’s products, but the company is trying to hedge for the risk by getting more into media business.

Bottom line

GoPro’s near-term future is a little bit cloudy, but the challenge will be short-lived given the company’s robust product pipeline slated for 2016 release.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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