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Can GoPro (GPRO) Trump Sinking Top Line and Drone Delay?

We have issued an updated research report on GoPro, Inc. GPRO on May 9, 2016. Last week, the company reported a mixed first quarter with a whopping 50% decline in its top line. In addition, GoPro postponed the release of its much-anticipated consumer drone Karma to later this year.

In recent months, the company has been struggling to achieve its earlier growth and go beyond its trademark action cameras. Its latest camera, the Hero 4 Session, failed to hold consumers’ interest at a time when the market for action cameras is becoming increasingly saturated. Particularly, weak initial sale-through and subsequent price adjustments of HERO4 session have hurt GoPro’s earnings significantly in recent times.

Currently, it seems that the market is flooded with cheaper and better alternatives to GoPro’s HERO series, severely hurting its bottom line. Competitive forces from Sony Corp. SNE and China's Xiaomi are also exerting pressure on GoPro’s market share.

The delay of the drone, coupled with a terrible revenue decline, highlights the uphill battle that GoPro faces as it attempts to broaden its customer base.

Moreover, in order to maintain its dominant market share, the company continues to spend a significant amount on research & development (R&D). In first-quarter 2016, R&D expense rocketed around 46% on a year-over-year basis, driven by investments in the development of next-generation cameras and drone-related products, as well as software and entertainment initiatives. This led to a 37% year-over-year increase in operating expenses in the quarter, which put significant pressure on margins and profitability. Although the company is utilizing R&D more efficiently, we believe that increasing competition will eventually put pricing under pressure.

Now, it seems like GoPro is betting huge on the success of Karma to expand its client base. The company is facing pressure to establish a more mainstream market for its cameras, but tough competition from smartphones from brands such as Apple Inc. AAPL and Samsung Electronics Corp is making it difficult for the company.

On the positive side, GoPro is exploring several new revenue streams, including Virtual Reality and licensing content shot on its cameras to media companies.In fact, GoPro now offers one of the world's most comprehensive platforms for capturing, stitching, sharing and enjoying VR content, through its new VR capture rigs, Omni and Odyssey and stitching software, Kolor. Also, the company has made significant improvements to its editing software, on the back of its recent acquisition of two of the most popular mobile editing apps, Replay (rebranded as Quik) and Splice, which are experiencing robust adoption.

GoPro is preparing to venture into the air-born equipment market, and is slated to release its own quadcopter drone, Karma, in the coming holiday season. This will likely open a fresh revenue stream for the company. GoPro insists that Karma will be powered with revolutionary features that will make it stand out from other drones.

We believe that GoPro’s efforts to explore new revenue streams, expand user base and transform itself from the ‘camera maker’ to ‘content maker’ will unlock significant growth in the coming quarters. However, the company still faces formidable headwinds like competition, saturated market and high operating expenses.

Echoing similar sentiments, over the last seven days, the Zacks Consensus Estimate for second-quarter and full year 2016 loss widened by about 5.8% and 3.3% respectively to 55 cents and $1.24 per share. Consequently, the company currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

A better-ranked stock that could be worth a look now is Dolby Laboratories, Inc. DLB, sporting a Zacks Rank #1 (Strong Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
GOPRO INC-A (GPRO): Free Stock Analysis Report
SONY CORP ADR (SNE): Free Stock Analysis Report
DOLBY LAB INC-A (DLB): Free Stock Analysis Report
APPLE INC (AAPL): Free Stock Analysis Report
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