1 Reason to Buy GoPro Stock, and 1 Reason to Stay Away

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GoPro (NASDAQ: GPRO) has made a terrific comeback on the stock market in recent months thanks to renewed demand for its products. The action-camera maker was struggling coming into 2017 as a flawed product strategy and the botched launch of the Karma drone dented sales.

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The company's distributors were left with excess inventory back in 2015, and the effects of poor inventory management were seen last year as well. But GoPro has now got its act together. It moved just over 1 million cameras in the last-reported quarter, up significantly from the 759,000 units moved in the prior-year period.

The company's refreshed product lineup going into the holiday season indicates that it could sustain its momentum. However, there is a potential headwind that could derail GoPro's rally -- cheap Chinese competition.

GoPro is stepping on the gas with refreshed products

GoPro recently launched its new flagship action camera -- the Hero6 -- and introduced the Fusion 360 camera. It also gave a much-needed update to the Karma drone, which means that the company has a strong lineup going into the holiday period.

Not surprisingly, GoPro expects its revenue and gross margin to be near the higher end of its guidance for the ongoing quarter. The new Fusion 360 camera, launched at a price of $699 and expected to go on sale in November, could turn out to be the game-changer given the potential of this particular market.

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The 360-degree camera market could clock an annual growth rate of over 34% from 2017 to 2024, according to one estimate. GoPro has come up with a compelling product to attack this opportunity. The Fusion 360 can shoot a maximum of 5.2K video with a frame rate of 30 per second, as well as capture spherical photos with an 18-megapixel resolution.

The company has made the new camera compatible with most of its mounts, and it comes with all the bells and whistles such as Bluetooth, Wi-Fi, and GPS connectivity. But what's more important to note is the price point. GoPro has managed to undercut rivaling 360-degree cameras from both Garmin and Kodak that are priced at $799 and $899, respectively, placing the company in a solid position to take advantage of the opportunity in this space.

Meanwhile, the Karma drone update has brought a host of essential features that GoPro's competitors were already boasting of. The drone can now capture images above it, and more importantly, it now comes equipped with the "Follow" and "Watch" features, whose absence in the earlier generation had put consumers off.

This should boost the popularity of the Karma further and translate into stronger sales. In fact, Karma was the second-largest-selling drone brand in the U.S. last quarter, so GoPro has made a smart move by making it more attractive with new features.

Cheap Chinese competition could spell trouble

Chinese companies have started flooding the market with action cameras and drones. The likes of SJCAM and Xiaomi's Yi could turn out to be potent competitors for GoPro. For instance, SJCAM has been touted as one of the best alternatives to GoPro given the strong feature set and specs of its cameras. Furthermore, it costs way less than a GoPro. 

Similarly, Xiaomi's YI 4K action camera matches the GoPro Hero5 Black closely in terms of tech specs and battery life but sells for less than half the price. This could hinder GoPro's potential growth in price-sensitive Asian markets such as China and India. It is already well-known that Chinese smartphone OEMs (original equipment manufacturers) are dominating the mobile landscape in these markets, so it won't be surprising if a similar trend is seen in action cameras as well.

The improving hardware quality and software support of Chinese action camera OEMs could endear them to consumers in such markets where a GoPro action camera falls in the category of a luxury item. Meanwhile, Chinese drone-maker DJI Innovations is already undercutting GoPro on price and is offering a stronger feature set on its new drones.

DJI has priced its latest Spark drone at $499 (including camera), which is well below the $799 for the Karma drone (but without a camera). This makes the Spark compelling value as it comes with a host of features such as obstacle avoidance, preprogrammed flight paths, and a return-home feature. Furthermore, the Spark's flight time of 16 minutes and 2-kilometer range are closing in on the GoPro Karma's 20 minutes of flight time and 3-kilometer range.

Therefore, GoPro investors shouldn't take the company's success in the drone and the action-camera markets as a given. Chinese players have already demonstrated their ability to come out with competitive products at far lower prices, and they won't allow GoPro to have a free run.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends GoPro. The Motley Fool has a disclosure policy.