Is GoPro, Inc. a Buy?

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Anyone who's been following GoPro Inc. (NASDAQ: GPRO) for a while will know that the company has fallen on some hard time as of late. The company's share price is down nearly 8% over the past 12 months and has fallen a staggering 87% over the past three years. That drop has meant that GoPro's shares are now trading at 18 times the company's forward earnings, which is far below the tech sector's industry average.

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That massive share price drop and the relatively low forward price-to-earnings ratio means GoPro is a bargain right now, right? Not so fast. I think the company still has a lot more to prove before I'd recommend it.

There are signs of life but I still have my doubts

Let's start with what's going right for GoPro, and why some investors may be inclined to buy the stock.

First, the company is starting to see some positive financial growth. In the third quarter of 2017, the company grew its top line by 37% year over year and reported earnings of $0.15 per share, which easily beat analysts' consensus earnings estimates of just $0.02. Gross margin has also rebounded to just over 40%, up from a low of 32% in the first quarter of the year.

Second, GoPro continues to build a strong product line. The company's new HERO 6 camera helped boost some of the preceding numbers because it sells for the premium price of $499, which helped increased overall average selling prices for the company by 22% in the quarter. GoPro also just started shipping a new camera, called the Fusion 360, which shoots 360-degree footage and costs $700. And of course, the Karma drone has turned into a minor success after its initial debacle and is now the No. 2 best-selling drone priced under $1,000.

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Despite all of this, there are still a lot of unknowns with GoPro's business. For example, the company's management expects revenue between $460 million and $480 million in the fourth quarter, which would be a 13% year-over-year drop at the midpoint. That might not seem all that bad until you consider that this is the outlook over the current holiday quarter, which should be one of the company's best-performing times of the year.

But that's not what what worries me the most about GoPro. What really keeps me from thinking this company is worth buying is that I don't see it building any type of economic moat for its business. Yes, GoPro has great cameras and a decent drone. So do plenty of other companies. And sure, it may be a leader in action cameras, but how often do you need to buy one of those?

My point is that that GoPro doesn't have anything that gives it a sustainable competitive advantage. I know its products are some of the best in the action camera world, but there's nothing locking its customers into its ecosystem for years to come. I think for GoPro to be a solid investment, it needs a strong software element that keeps users coming back to its products year after year. Better yet, it needs a software product that can generate significant recurring revenue after a customer buys one of its products.

Of course, GoPro has tried to get users hooked into a handful of its software offerings, but it hasn't worked out yet. Until it does, I don't think GoPro is a buy. Plenty of other investors may disagree with the idea that GoPro needs a strong software offering, but I don't think the company will be able to grow into a solid long-term investment without it.

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Chris Neiger 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.