This is a follow up to a couple of previous blog posts about Wall Street’s unwarranted bearish outlook on GoPro, which you can find in this first post and this second post. I was right about the stock rebound, but it has gone back down again, and I think it is a screaming BUY, so here we go again!
GoPro Inc. (GPRO) hit an annual low this month after reporting its second best quarter ever. According to GoPro Founder and CEO, Nicholas Woodman, “Our core business is enjoying terrific momentum as we charge forward into attractive adjacent markets.” GoPro hit its previous low in March after it continued to post strong quarterly gains, followed by another ascent on the back of continued strong results.
Surely, you ask, Wall Street must be missing something to cause the stock to crash yet again. The market seems to have the notion that GoPro, despite its impressive earnings, revenue, and margins, is once again on the verge of collapse as the action camera fad ends and sales plummet as it reaches its last niche customer. Not that there is any evidence of this, mind you, but that is the fear.
In the second quarter of 2015, GoPro reported almost $420 million in revenue, a 72% year-over-year increase and their best quarter ever. Earnings per share jumped from $0.08 to $0.35 year over year and gross margin increased 420 basis points to 46.4%. It was a beat on guidance for all three measures.
Third quarter guidance is for revenue of between $430-445 million, which would be a 56% year-over-year increase. EPS should be $0.29 to $0.32, with gross margin at about 46%. Analysts reacted to the strong quarterly results by increasing their own estimates and reiterating indications that the brand is still extremely popular.
All seemed well until the stock started in mid August to slide from the $60s to below $30 for no apparent reason. If this sounds like “déjà vu all over again,” it does seem to be a repeat of the previous period of volatility between December and March. After weeks of a declining share price, analysts started to point to previously-expressed fears about the company’s prospects against cheaper Chinese competitors such as Xiaomi or well-known brands such as Sony. Slower than expected sales of the new Hero 4 Session, which was priced at $399, the same as the Hero 4 Silver, caused GoPro to slash the price by $100. This caused analysts to fear that, this time, GoPro had finally lost its appeal.
Piper Jaffray downgraded GoPro based partly on the Session price cut and partly on a teen survey that showed a deceleration in holiday wish list activity and a reduction in its Amazon product sales index. According to Analyst Erinn Murphy, “We believe we are starting to see the tipping point of demand in our survey and against a holiday with no new products likely on deck, prefer to sit on the sidelines.” But she also cited volatility as a reason for “stepping to the sidelines” on the stock. Seriously—she cited volatility as a reason to downgrade a stock. That is just as bad as recommending a stock just because it is going up.
I suspect that simple fear and the taking of profits was the real cause for the stock’s price drop rather than any credible news. One of my favorite quotes from Frank Herbert’s science fiction classic Dune series is this: “I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration….” Well, the stock price has clearly been crushed over the past two months, but company performance is another matter entirely.
On September 1, GoPro’s video chip supplier, Ambarella, reported outstanding results, but provided guidance that made analysts even more nervous. What Ambarella’s CEO actually said during their Q2 earnings call was this:
“As we discussed in our Q1 earnings call, wearable camera revenues are expected to be down sequentially and year over year, reflecting the substantial build of newly released and existing products in Q2 of this year by GoPro and Xiaomi, rather than in Q3 as occurred in the prior years. However, we see the average of Q2 and Q3 unit shipments between FY16 and FY15 being in line with our growth expectations for this market.”
Sounds like no big deal, right? As you can see from GoPro’s guidance, they “only” guided for a 56% year-over-year increase in revenue for the third quarter, compared to the 72% increase in the second quarter. This makes sense if you consider Ambarella’s comments that the second quarter will show slower growth due to the shift in product launches back from the third to the second quarter.
The same kind of shift in sales happened in the first quarter of 2013, when holiday shipment delays caused a shift in revenues to January. This made the seasonal decline in revenue in 2014Q1 appear higher than the seasonal decline in 2013Q1. When GoPro had a blowout holiday quarter in 2014Q4 and issued conservative guidance for 2015Q1 showing an even larger seasonal decline, analysts panicked and drive down the stock price. Here is the GoPro guidance I’m referring to:
“Revenue and units shipped for the three months ended March 31, 2013 were impacted by production delays of our HERO3 Black edition capture device in the fourth quarter of 2012. These production delays correspondingly delayed shipments until the first quarter of 2013, which resulted in revenues in the first quarter of 2013 that did not reflect the traditional seasonality in our business. The three months ended March 31, 2014 were not similarly affected.”
After Q1 2015 results beat expectations, showing that action camera sales were not a fad already on the decline, the stock moved back up. What does this all mean? That analysts are prone to confirmation bias of any guidance, news, or even surveys that might confirm their worst fears. Namely, that GoPro is a fad that will eventually end, or will face overwhelming low-price competition, or will face other well-known competitors who will challenge their market share and compress profit margins. Yet, none of these fears have materialized. In fact, GoPro has been facing all these potential threads head on with brilliant marketing, top-notch engineering, world-wide sales channels, and a focus on entering new adjacent markets such as virtual reality and drones.
The Session camera appears to be a very good product that was improperly priced. Consumers seemed to prefer the Hero 4 Silver, which has a built-in touch display and higher-resolution video options. GoPro was actually quick to respond to customer feedback and correct the mispricing of this product, which should lead to better sales. In any case, consumers still seem to be purchasing high-end GoPro models rather than abandoning the brand for competitors.
What can we expect when GoPro reports its third quarter results on October 28th? I can’t say, because when fear rules, it isn’t enough to beat expectations, as Under Armour found out last week. Nevertheless, for investors who are focused on the long term, GoPro is a compelling investment opportunity. It is a company focused on growing into new markets and has a premium brand that gives it strong pricing power. I’m not willing to try and time the market by predicting when Wall Street will come to its senses, so I’m taking advantage of this pullback to pick up some more shares at an incredible discount.
Disclosure: I own shares of GoPro (GPRO).
Update: Boy, was I wrong on this one. Maybe it will bounce after it hits rock bottom! I’m still optimistic about drones and virtual reality camera rigs, so I’m still pulling for you GoPro….