GoPro: Risk Realized – GoPro, Inc. (NASDAQ:GPRO)

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About a month ago, I outlined why GoPro’s (GPRO) stock looked attractive around $4 and below. Management raised guidance on the Q2 conference call and looked for revenue growth between 9% and 12% for the year. This was an improvement from the ~8% (at the midpoint) revenue growth expected during the first half of the year, and so I outlined how the company was moving in the right direction.

I cautioned about the risk management posed to the stock and the financial well-being of the company but said it had already put up numbers, which added confidence it had turned the corner.

While I don’t entirely put my trust in management due to past repeated failures, this time, it has put up the numbers ahead of the bigger plans and raised guidance.

And it had. Up until Wednesday.

Wednesday, it broke the news of a production delay late in the game for the new HERO8 Black, which will cause a shift of revenue from Q3 to Q4. No biggie, though, full-year guidance will still be intact, it’s just a matter of which quarter it’s recognized in.

At least that’s what I expected to read in the press release.

But, no. It was also enough to reduce guidance under what it was originally for the full year. If we go back to the second quarter conference call, it was laid out rather easily to see where it had come from and where it was expected to go.

Our full-year expectation based on the above, its revenues to grow between 9% to 12% for $1.25 billion to $1.28 billion an improvement over our prior guidance of 7% to 10% growth … for the second half of 2019, we expect revenues to be in a range of $715 million to $746 million

This compares to the updated guidance as of October 2nd:

Revenue [in the second half]: $680 million to $715 million, representing 6% to 9% annual growth, which is below the Company’s previous estimated growth of between 9% to 12%

A recap looks like this at all the midpoints: 8.5% to 10.5% to 7.5%. It went from good, to better, to worst of all. It should have said, “…which is below even the original guidance we issued.”

If you look at the title of my previous article, you will notice it was accurate – the stock was down, but the outlook was indeed up. Now, that’s no longer true – the outlook is now down from original first-half guidance. This would mean my thesis – predicated on the improved guidance and double-digit revenue growth for the year – has been caved in on by this production delay.

This isn’t the first time the company had a production delay on its flagship product. Back in Q3 of 2016 when it was launching the HERO5 Black and Karma drone, it experienced production issues causing a delay in the release of the HERO5. It appears anytime the company changes the form factor or the design of the camera, it sees production delays. The HERO5 was the first product to depart from the white, naked camera and move to a fully waterproof case-less design. This year, the company is going to a frame-less chassis using integrated mounting fingers, integrated lens cover, and a semi-moddable design capable of taking new filming accessories. It’s also changing the battery to a higher discharge type and moved everything (battery, SD card, USB-C port) to one door. While I don’t know exactly what the production issue is, some educated guesses include a flawed screen design or a heat issue seen by several initial reviewers.

(Source: The Verge HERO8 Review)

For the record, I’ve never damaged any of my GoPro screens, so the above picture is surprising to me.

Regardless of the specific issue, management clearly does not build in buffer time or proper testing – or both – when it materially changes the camera design. Unfortunately, the only likely risk reared its ugly head and bit the company, and now investors.

Furthermore, back in 2016, when this happened, it still predicted positive things for 2017 like double-digit revenue growth and net income profitability. Yet, we know that turned out to be the year of the Karma recall, and a year where revenue declined from $1.185B to $1.179B – a decrease of 0.5%.

Now, I’m not advocating a short here – for one because I don’t short stocks – but because there will still be growth and the bleeding has indeed stopped as there will still be year-over-year growth. However, the company can’t get out of its own way to capitalize on demand and the ability to still sell cameras. As a customer, there are some enticing new capabilities on HERO8 and the MAX looks easier than ever to use for a 360 camera, not to mention within reason on price. But, to be investable, the company can’t repeat issues, which it’s doing as a habit and not as one-off events.

For these reasons, I exited my position at the open on Thursday and will go back to the sidelines. Things looked to be turning around, but management didn’t change procedures or processes from the last time to mitigate risks to a hardware design change. I gave management another chance, but it’s not worth the risk for the reward – which was looking rather nice as my position was up over 27% before Thursday. Instead, I’ve exited with a 5.5% profit (thankfully) at Thursday’s open.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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