GoPro's Future Is Foggy Despite Picture-Perfect IPO

NEW YORK (TheStreet) -- There was nothing amateurish about GoPro's (GPRO) initial public offering last week.

After the stock skyrocketed 31% on its first day to close at $31.34, shares hit an intraday high of $40.47 on the second day of trading. On Monday, shares closed at $40.55, representing a 70% jump from GoPro's high-end initial offering of $24 per share.

Already billed as one of the hottest IPOs to have hit the market since Twitter (TWTR), GoPro's blockbuster debut is certainly living up to the hype. For its sake, let's hope this is the last time the word "hype" and GoPro are used in the same sentence. But as with its cameras used for underwater images, don't hold your breath.

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There are two things that worry me about GoPro's long-term success. First, the stock's valuation is now trading at 60 times 2013 earnings. The market is betting that GoPro's earnings will rise over time. But even if they do, the competition in this space from Samsung (SSNLF) and Sony (SNE) are being ignored.

Consumer electronics has never been a high-margin industry. The only guarantee is electronics prices will drop over time. It's the only way to maintain long-term revenue growth. With GoPro's 2013 margins falling 6.5% to 36.7%, this has already begun to show.

While Samsung and Sony both have strong brand recognition, the only mistake they've made up to this point is not having invested in GoPro's core market to make any sort of impact. It is only because of this lack of interest from Samsung, Sony and others like JVC (JVCZF) that GoPro now enjoys a 45% market share.

GoPro, which launched its first high-definition camera five years ago, has sold almost nine million of its mountable/wearable HD cameras. It's an impressive number. But it's still a niche market, which brings me to my second point of worry -- commoditization and pricing pressure

Any market worth pursuing is certain to attract a lot of attention. GoPro's success and its business model will cause Samsung, Sony and several others to reevaluate the opportunity they have ignored.

Despite GoPro's dominant market position, GoPro's first-quarter revenue of $235.7 million was down almost 8% year over year. Earnings of $11 million fell more than 50% due to pricing/margin pressure. At some point prices may drop too low for the business to be worthwhile.

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