With GoPro, Buy the Camera -- Not the Stock - TheStreet

GoPro (GPRO) - Get Report looked like it was relentlessly sinking, but it threw a last-minute Hail Mary pass and announced new products for the holidays. Can they save the company?

Currently the consensus is looking for fiscal 2016 revenue of $1.39 billion, down 14%, and earnings are expected to be a loss of $1.07 per share.

With several new products for the holidays, revenue will likely rebound into the first half of 2017, but it remains to be seen if there is sufficient demand to keep the stock moving higher.

On Sept. 19, GoPro introduced the Hero5 Black ($399), the Hero5 Session ($299) and a drone called the Karma ($799). The products are competitively priced when compared to Garmin's (GRMN) - Get Report $499 camera and Sony's (SNE) - Get Report $399 offering. GoPro even offers a low-end model simply called the Hero Session for $199. The company also announced an online video storage service for $4.99 a month. The cameras should be available the first week of October; the Karma launches Oct. 23. DJI's drone, the Mavic, starts shipping almost a full month earlier on Sept. 27.

With the addition of new products for the holidays, analysts are forecasting revenue to grow 23% in 2017 as retailers restock their shelves. But it remains to be seen how many of the newer cameras will actually sell. GoPro Silver is still the best-selling action camera.

A lot has to go right for the stock to lift. The company has to re-establish sales growth, expand margins, fight off considerable competition and find more ways to expand the available market.

As revenue growth slowed, operating margins and income were wrecked. In 2014, revenue grew 41%, but revenue slowed the next year to 16%. Operating margins went from 13.4% to just 3.4%. Operating income in 2014 was $187 million, and is estimated to be a loss of $225.2 million in fiscal 2016. Not a good trend!

Assuming a successful product introduction, revenue should rebound 25% to 30%, or $1.6 billion to $1.8 billion. If margins can come back to 41% to 42%, GoPro will lose only 25 cents per share. Since earnings will still be negative, Wall Street will use adjusted earnings before interest, taxes, depreciation and amortization to value the stock. Under the best-case scenario, adjusted EBITDA will be between $90 million and $100 million, which would be less than the peak of $282 million, recorded in 2014.

So while the new products are likely to generate a big pop in sales, the pop is unlikely to be sustainable. In my opinion, the business peaked in 2014 and hasn't been the same since. In 2014, the company earned $1.53 per share. It is unlikely that GoPro can match that number anytime soon. If you assume GoPro generates $2 billion in revenue in 2018, the company will still be lucky to earn a dollar per share.

In my opinion, there is too much competition for a relatively small market and the company can't hold margins high enough to generate very much earnings growth. I don't think GoPro has enough fuel to get the stock much higher than a temporary pop -- and I would sell the stock into the pop.

Buy the camera instead of the stock.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.