Think Before Putting Your Money In GoPro Inc (NASDAQ:GPRO)

While GoPro Inc (NASDAQ:GPRO) has been touted as the hip and cool manufacturer of high definition point of view cameras, and is the biggest name for those who want to capture footage of extreme sports and adventurous activities. However, from the perspective of an investor, these words mean very little. Investors look for outstanding returns, as well as keeping huge share losses as small as possible.

While there have been numerous reports written about the camera manufacturer already, but it seems necessary to share another point of view of the hyped up stock.

Product Line

The company entered the market and sold its first camera system in 2004. Now it’s 2014, and after ten years, GoPro has grown its lineup of products and gains revenue from a variety of cameras, accessories, and mounts. The company’s main emphasis is still on high definition cameras.

The company puts the spotlight on its Hero 3+ cameras, which has a price tag that ranges from $199.99 to $399.99. These cameras are on the high end of GoPro’s product range.

GoPro’s mounts are essential for photographers to be able to take a shot at every angle possible, and get that “one in a million” shot. For example, GoPro makes a mount that attaches to a dog harness.

The camera maker’s accessories lineup covers every aspect of the photographer’s needs possible, such as a structure that houses the camera and a LCD touch pad. The company even sells a GoPro bag to hold all your GoPro products and accessories that retails for $19.99.

At first, all this seems like a company that makes trendy and fashionable products. If the brand is strong, this could actually work.

GoPro’s IPO and Return Distribution

Ever since GoPro’s initial public offering on June 26^th 2014, the company’s share price has been all over the place.

The percentage of the initial opening price that is being traded on a daily basis is quite substantial. The fact that GoPro’s stock is doing that should raise some concerns among investors, since its main buyers are not sure what direction the company’s stock should trade at.

The average percentage comes out to be 6.5 percent on a daily basis. It is already impressive that annual return, but the fluctuating portfolio of 6.5 percent each day is a different case. Essentially, a swing that wide shows that the company is not a stable investment, and should be considered a volatile gamble.

Valuation

GoPro’s gross margins have been dwindling downwards since 2011, from 52.3 percent to around 40 percent today. Many analysts and investors think that the poor quarterly results are due to the release of a new camera, or the valuation does not include compensation based on its shares. While these reasons may be validated, it doesn’t change the fact that the numbers are still going down.

Last quarter, GoPro’s quarterly financial reports clocked in a net loss of $0.24 per diluted share, or a total net loss of $19.8 million. In the same quarter one year ago, the company reported a net loss of only $5 million, or $0.06 a dilute share.

As an investor, one should worry about the increase in operating expenses, especially the general and administrative expenses, which as grown from $7,044 from the end of the second quarter in 2013, to $41,171 at the end of the identical quarter this year in 2014. This expense has grown faster than revenue, which shows that GoPro is having trouble finding a good balance between revenue and maintaining costs. If the competition grows stronger, which is inevitably will, GoPro’s margins will be decimated and the company will quickly go under.

Additionally, the misleading and false comparison has been made between GoPro and Google Inc (NADAQ:GOOG), Apple Inc (NASDAQ:AAPL), and Netflix (NASDAQ:NFLX). However, these three tech companies were able to generate huge amounts of cash while still retaining high levels of revenue, and thus a solid growth in income. From an investor’s perspective, that is the ideal type of situation.

Instead of doing that, GoPro is slipping and struggling to find its balance its profitability with its costs. Given that, the fact that the price of its stock is skyrocketing raises the concern of a bubble forming. While the parallels that have been drawn between GoPro and Apple or Google is substantiated from a return on shares point of view, but beyond that, the parallels stop. They have different products, different margins, and a different audience.

Competition Threats

For GoPro, one of the dangers lurking in the shadows is its competition. The market is relatively young, and it is subject to rapid and sudden changes. Brand name is vital, but reputation is key. Other rivals will try to take a portion of GoPro’s market share, and although its supporters strongly believe that there is only one GoPro camera and competition is nearly nonexistent, from a business point of view GoPro will have to lower its margins. And as a relatively new start up, lowering margins isn’t one of the things it wants to do yet.

In order to preserve its margins, GoPro only has one option – to invest into large scale manufacturing operations, which will cut costs and lower the pressure on margins.

Media Content

Right now, GoPro’s success is closely tied in with the success in the sales of its cameras. To pull back from that dependence, GoPro is now gathering its forces and focusing them on creating and monetizing media content.

The GoPro network is a website where anyone can uploading and submit their video to the site. Then, that video may be featured on the company’s official Facebook, Twitter, and Instagram pages.

However, it is important to keep in mind that while GoPro puts its logo on much of the media content, that footage is not the property of GoPro. Only the hardware used to record and capture the footage is the legal property of the company.

The company understands that new sources of revenue are key to its survival, and in an environment where every media force fights for ad revenues, GoPro cannot afford to be written off as a minor player and deal with profit cuts from companies like YouTube, which takes 45 percent of the ad revenue.

A possible solution is to set up a dedicated video site run by GoPro itself. But with so many high definition videos, the costs to store all the files would most likely offset any revenue, let alone any profit that would be gained. Even if the company was able to pull off such a website, it doesn’t offer any unique features that puts it above YouTube.

Facebook (NASDAQ:FB) reports an average revenue per user of about $2. For GoPro, it is nearly impossible to achieve a figure anywhere near that.

Major Issues With GoPro

First, the competition in the market will only become stronger and fiercer. This will cut margins and profitability. Given that GoPro already has issues in balance revenues with expenses, the company’s profits will decrease immensely. From there on out, it’s the end of the game for GoPro.

Second, the possibility of another financial crisis would cripple GoPro. The company currently gets most of its revenue from the holiday shopping season. Given that the stock markets and the economy is at a comfortable high right now, it is very likely that a heavy correction might occur sometime in the near future.

Third, the company can only sell a finite number of cameras. After the market is saturated with all these GoPro cameras, the company’s growth will likely decline, and it is unlikely that GoPro has set up other viable lines of revenue to be ready to continue its growth.

Next, GoPro may not be able to monetize its users who upload and share all these photo and video content. Profits via social media outlets are being heavily cut. While the proposal of having a new website with all video content by GoPro is still on the table, it may be too expensive.

Additionally, the market that GoPro works in requires everything to be cool and trendy. The terms cool and trendy can change in a day, and if a new competitor bursts onto the market with something truly revolutionary and out of the box, they could steal the market share from GoPro and take over GoPro’s head position of the market within a few years, eve months. The barriers to entry to this market are relatively low.

Another issue is that GoPro is neither a candidate for long term investment nor for short term. A dedication to either side could hurt investors in the end. While investors may be able to predict its shares during its quarterly reports based on basic valuations, the possibility of making a mistake is still considerably great.

The final issue is that GoPro is used by extreme athletes who pursue activities that put their lives at risk. Whether or not GoPro loses a court case, if an accident were to happen in the name of the GoPro brand, the company’s reputation and brand could take a hard hit, and in the end, such a tragedy could be more costly.

What Does GoPro Come With

Currently, GoPro’s price earnings ratio exceeds 100. Investors must ask themselves: is any investment worth 100 times its earnings? The price to earnings ratio for similar companies such as Sony or Canon fluctuate around the range between 10 and 30.

Even tech giants like Facebook and Twitter do not have such over valued figures. From a analytical perspective, it is simply impossible that GoPro can meet those expectations.

Currently, the price for one GoPro stock is $58.75. In order to reach an average price to earnings ratio of 20, the company’s net income will have to reach well beyond $300 million. That is 5 times its reported profit for the 2013 fiscal year. GoPro is far off from achieving those goals.

Conclusion

For anyone looking for a stable and reliable long term investment, GoPro is a terrible idea for obvious reasons.

For those looking to risk a ton of cash for the potential to either double your money in a year or lose more than half, GoPro may be the stock for you. Sometime a gamble like this plays out well, but sometime it doesn’t. The best bet would be to watch GoPro during its first quarterly report, and wait for the holiday season as that will be when GoPro either rises or falls.

Given the share potential of the company, it doesn’t seem like GoPro has a bright future. The growth numbers that are coming out of GoPro simply are not sustainable and will only yield disappointment when the share price is trimmed massively. However, if the stock hits $100 within the next twelve months, that would not be a surprise either.