GoPro’s stock price has taken a beating over the past six months, shedding 48.3% of its value and falling to $0.69 per share. This might have investors contemplating their next move.
Is there a buying opportunity in GoPro, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why we avoid GPRO and a stock we'd rather own.
Why Do We Think GoPro Will Underperform?
Known for sponsoring extreme athletes, GoPro (NASDAQ:GPRO) is a camera company known for its POV videos and editing software.
1. Decline in Cameras Sold Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like GoPro, our preferred volume metric is cameras sold). While both are important, the latter is the most critical to analyze because prices have a ceiling.
GoPro’s cameras sold came in at 580,500 in the latest quarter, and over the last two years, averaged 6.7% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests GoPro might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, GoPro’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
GoPro burned through $129.2 million of cash over the last year, and its $122.2 million of debt exceeds the $102.8 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the GoPro’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of GoPro until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
GoPro doesn’t pass our quality test. Following the recent decline, the stock trades at 3.7× forward price-to-earnings (or $0.69 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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