How Risky Is GoPro Inc.?

By Markets Fool.com

Image source: GoPro.

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With shares down nearly 70% over the last year, it's clear that GoPro (NASDAQ: GPRO)hasn't lived up to its hype. During this time, the action-camera maker experienced slowing sales, a major product delay, increased competition, and disappointing results from its quest to become a prominent media company.

In light of the challenges GoPro faces to improve its fortunes, the question of the stock's riskiness remains more relevant than ever.

An epic nosedive

During the first half of 2016, GoPro's revenue fell a whopping 48.4% year over year to $404.3 million compared the same period the year before. Between periods, GoPro sold 51.2% fewer cameras. This decline can be attributed to how the first half of 2015 benefited from the release of its flagship HERO4 silver and black cameras just a few months before, and the company's more recent decision to make its product line simpler by reducing the number of options available to consumers. According to CEO Nick Woodman, GoPro reduced its channel inventory by 35% between the first and second quarter of this year, and the company plans to release the HERO5 line, successor of the HERO4 line, later this year.

Aside from the pricing debacle surrounding its HERO4 Session, which led to inventory writedowns and lost revenue, major product introductions have historically translated into stronger sales at GoPro. However, when there's a large gap between major product introductions, as there was between the first half of 2015 and 2016, products run the risk of becoming stale in the marketplace and can cause sales to dramatically fall. Essentially, since GoPro is primarily a hardware maker, it's under constant pressure to introduce updated versions of its products that captivate users and reignite demand before its products go stale.

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Bad Karma

Along with its first-quarter earnings, GoPro announced that would delay the introduction of its highly anticipated drone, Karma, from the first half of this year until the upcoming holiday season. Since Karma is GoPro's first drone and details remain sparse, there are a lot of unknowns about how GoPro will effectively compete against the likes of DJI and other notable players. Without a detailed understanding of Karma's key features and price point, it's impossible to assess the impact that Karma could have on the drone industry and GoPro's own business.

However, as fellow Fool Leo Sun pointed out, GoPro only started developing its drone about two years after market leader DJI released its first Phantom drone, and DJI now has 10 years of experience in developing drones. In other words, GoPro lacks expertise when it comes to the drone market, which is especially apparent in light of management's decision to delay Karma. Ultimately, this lack of expertise could cause Karma to crash land upon release. In this instance, a drone failure would likely put added pressure on GoPro's core action-camera business to drive longer-term growth.

Standing out

A quick internet search for the term "action camera" quickly reveals how crowded the marketplace is for GoPro. The same goes for the terms "drones" and "virtual reality" -- GoPro's other main areas of interest.

Generally speaking, the more competitive an industry, the more difficult it is to stand out. If two products are near-identical in the eyes of consumers, the cheaper product tends to win. For hardware companies that lack differentiation, this could create a dynamic where lower prices become a competitive advantage, which invariably eat into profitability.

To mitigate this risk, GoPro must ensure that any hardware it releases is well differentiated in the marketplace. Ideally, GoPro should also find ways to diversify its revenue outside of hardware sales. To date, GoPro has been making investments in services, software, and media as potential avenues to generate new sources of revenue, but has yet to be successful.

Putting it all together

With more than $279 million in cash and zero debt on its balance sheet, GoPro appears to have enough resources at its disposal to navigate the challenges it currently faces. And while GoPro expects to return to profitability in the fourth quarter later this year, the volatility surrounding its core hardware business and the uncertainty around it entering new markets make the stock unsuitable for more risk-averse investors.

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Steve Heller has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.