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GoPro (GPRO): Stock to Surprise This Earnings Season?

GoPro, Inc. GPRO is slated to report first-quarter 2016 results after the closing bell on May 5.

In the preceding quarter, the company disappointed investors by posting a negative earnings surprise of around 75.0%, marking its second consecutive negative surprise. Though the company has managed to beat estimates in two of the last four quarters, the massive misses have brought down the average positive earnings surprise to a modest 1.2%.

Let’s see how things have been shaping up before this announcement.

Factors to Consider

We believe GoPro’s concerted efforts to regain traction in its HERO line of capture devices with subsequent price cuts and pruning of its camera portfolio may provide the much required boost to its quarterly sales. During the fourth quarter of 2015, the company had re-launched its Hero4 Session camera at a lower price and generated over three-fold increase in sell-through rates in December, demonstrating the market traction gained by the product. Moreover, a steady surge in the company’s sale of capture device accessories is also expected to offer some respite after the precipitous sales slump over the past six months.

In addition, GoPro is making strategic investments in talent, technology, software and innovative new products via a spate of deals with athletes, sponsorship events and partnerships with several industry giants that are likely to be conducive to the quarterly results. During first-quarter 2016, GoPro inked a patent licensing agreement with Microsoft Corporation, renewed its partnership with National Hockey League (NHL) and the National Hockey League Players' Association, collaborated with The Recording Academy on GRAMMYcam and announced a global tie-up with PGA TOUR.

Furthermore, growing popularity of GoPro app downloads (up 28% year over year during the fourth quarter of 2015) and GoPro studio installations (up 67%) also signal toward the thriving easy-to-use software market. Moreover, impressive performance by the GoPro Channel coupled with aggressive television marketing as well as digital “out of home and in-store” initiatives are expected to drive growth in first-quarter 2016.

Despite these positives, GoPro’s cannibalistic product launches have proved to be a major headwind hurting its financials over the past quarters. For instance, plummeting sales of HERO4 session cameras owing to increased adoption of its HERO4 black and silver products implies that such factors may continue to impact top-line sales.

Other than this, a host of operational issues like escalating charges related to the re-pricing of its HERO4 camera and charges in relation to piling up of excess inventory, may weigh on GoPro’s margins during the quarter to be reported. Also, expected severance costs in relation to the company’s plan to lay off 7% of its workers may also compound operating expenses.

Additionally, the ongoing economic slump in China, which is one of the major markets of the company, and waning sales of action sports cameras in the U.S., largely attributable to the slowdown in wearable camera markets, will likely hurt GoPro’s first-quarter financials.

Moreover, as the company’s 50% of revenues are generated outside U.S., currency fluctuations may pose a significant headwind to its performance in the quarter to be reported.

Earnings Whispers

Our proven model does not conclusively show that GoPro will beat estimates this earnings season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at a loss of 64 cents. This translates into an Earnings ESP of 0.00% for GoPro.

Zacks Rank: GoPro’s Zacks Rank #3, when combined with a 0.00% ESP, lowers the predictive power of ESP and makes surprise predictions difficult.

Note that we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider instead as our model shows they have the right combination of elements to post an earnings beat this quarter:

Central Garden & Pet Co. CENT has an Earnings ESP of +3.39% and a Zacks Rank #2.

Cinemark Holdings, Inc. CNK has an Earnings ESP of +2.13% and a Zacks Rank #2.

Tribune Media Co. TRCO has an Earnings ESP of +3.45% and a Zacks Rank #3.

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TRIBUNE MEDIA (TRCO): Free Stock Analysis Report
 
CINEMARK HLDGS (CNK): Free Stock Analysis Report
 
GOPRO INC-A (GPRO): Free Stock Analysis Report
 
CENTRAL GARDEN (CENT): Free Stock Analysis Report
 
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