Those who follow me for a while on eToro know that I am in a twisted love-hate relationship with the famed action camera maker. On the one hand, as a product, it’s brilliant and the way how it revolutionized video creation is undisputed. On the other hand however, as a company and a business model, and consequently, as an investment, the picture is not so glamorous.
In the last 12 months I’ve been on both sides of the trade around GoPro (long/short) and I’ve written about half-a-dozen articles on the company. Today’s one meant to be my ultimate analysis on GoPro. As such, it’s intended to be extensive, so you better grab a cup of coffee or something stronger and make yourself comfortable.
First of all, let’s make something clear. The way I see it, GoPro is a one-trick-pony. The company is working hard to break out from this, and in fact they could manage to convince the market towards the second part of 2020 that they can eventually succeed, but if we scratch the surface and connect the dots, it becomes clear that the company has a very, very long way to go from here.
But before we discuss what the future might hold for them, it is crucial to understandhow did a once-promising business ended up where they are today.
The GoPro Hero action camera – An unrivaled product for an untapped market
Back in the day, when founder and CEO Nick Woodman came up with the idea to make a camera that records decent footage while also being small yet sturdy enough to withstand a badass mountain ride, it was just simply revolutionary.
Before that, people had limited options capturing how they break a bone or two doing extreme sports. Just ask them:
photo credits (from left to right): whatuseek.com / pevly.com / Aaron Holliday
Woodman’s GoPro offered an unprecedented solution, filling a gap in the camera market and quickly becoming the no.1 brand in the segment of action cameras. To GoPro's credit, they didn't only dominate their market, in fact, they were the ones who created the niche of action cameras.
However, following a promising start, a rocking IPO and a few years of exponential growth in sales and profits (accompanied by a stellar valuation) GoPro's biggest advantage slowly turned out to be its biggest pitfall.
A Revolutionary Product with No Growth Potential
This sounds a bit absurd, isn't it? On the one hand, GoPro have become a well-established brand and a market leader in no time. On the other hand, it solely relied on the sales of one single product, a product with a near-perfect design that made it extremely difficult to meaningfully develop it any further.
Nevertheless, GoPro didn’t gave up on fine-tuning its flagship product, and also tried hard to create other products or services and thus establish additional revenue streams.
The company (correctly) saw the huge opportunity in consumer drones, and put significant resources into developing its own quad-copter. The result was the GoPro Karma drone, that has been released in 2016. Despite being a decent UAV, it couldn’t stand a chance against DJI’s Mavic Pro that has been released at the same time (and dominates the drone market ever since).
They also rushed into making the GoPro Karma Grip, a gimbal-like accessory intended to hold and stabilize the GoPro camera on the go.
Needless to say, none of these aged well. The Karma drone has been discontinued in January 2018, only 14 months after its debut. As for the Karma Grip, well, most people don’t even remember it ever existed.
Despite these epic fails in their attempts to expand their product portfolio, GoPro’s Hero line kept the show running, even if results were far from satisfying.
GoPro sold a record 6.5 million cameras in 2015 (thanks to GoPro Hero4) that dropped about 40% to 4 million in 2016, and remained flat ever since. Same goes for revenues, not to mention that net income also declined steadily. So did cash, which is by early 2020 have reached dangerously low levels (79.7 million in Q2 2020 vs 130.1 in Q2 2019).
This should serve as our Red Flag #1 – a company that has one main product and can’t meaningfully increase the amount of sales is shows that there is some ‘shit in the pancake’.
Meanwhile, total debt have increased from zero in 2016 to 130 million a year later that almost doubled by end of last year (220 million as of Q4 2019).
This right away gives us Red Flag #2– acompany that funds its operation using more debt instead of relying on sales is a very, very dangerous sign.
Of course, it is possible to twist and turn the numbers in the financial statements to create a narrative that supports the illusion of growth (which the company keeps doing during its quarterly reports), but looking at the bigger picture with a little common sense tells a different story.
And, while we are at discussing previous warning signs, back in 2018 the company’s CEO openly admitted that he is considering selling the business and seeking for an acquisition (Apple’s name has been thrown), which is clearly Red Flag #3 – A CEO who wants to sell his company. If he didn’t had faith in it, why should investors?
I guess some GoPro bulls dropped out reading by this point because frankly, about 98% of people automatically rejects arguments that go against their views. Those who are still reading however, can rightfully say that “well, okay, that’s all behind the company now, and things look promising, right?”
So, After this little detour to GoPro’s past, let’s address its present and what’s behind the recent buzz… and what’s likely going on in reality.
Recent Boost Is NOT A Genuine Resurrection
As I’ve mentioned before, the company is working hard to stay relevant and as a result of these efforts, the share price saw a very positive sentiment in the later part of 2020.
This hype was mainly revolving around two shifts the company is making lately. The first is to grow its direct-to-consumer’ sales channel and second is to strengthen its subscription business so they can generate an extra stream of income by squeezing out an extra $4.99 a month from GoPro owners.
Towards mid-October last year, GoPro’s share price skyrocketed by about 30% following a single press release on their website, stating:
“Thanks to a stellar global launch of HERO9 Black, our paid GoPro subscriber count is ahead of where we expected to be at this time and bodes well for us to exceed our previously-stated target of 600,000 to 700,000 paid subscribers by year-end," adding that “GoPro.com has seen substantial year-over-year sales growth during the post-launch period across all regions, globally… Demand for HERO9 Black and the GoPro subscription at GoPro.com are accelerating our shift to a more direct-to-consumer business."
The same press release also states that:
“Additionally, GoPro shared that high demand for HERO9 Black and the associated GoPro subscription drove 230% growth in GoPro.comsales over the comparable two-week post-launch period in 2019.”
I have to admit that back then I didn’t really understood the sharp rise at first because frankly, despite these seem to be good news, they aren’t good enough to justify a 30% jump. Just for the record, GoPro’s sales always spiked upon launching its next-gen Hero, so why the hype then?
One realistic explanation I could see was that the market has already written off GoPro as a dead cat following the disappointing results in recent years, and once it has shown some signs of life investors were rushing back to it.
But I am afraid that what people might see as a sign of miraculous comeback is in reality is nothing but hot air, and already lost its steam since then.
Let’s take a closer look on their finances to back this up.
According to the company’s financial reports, GoPro.com’s revenue in Q4 2019 accounted for only 11.6% of total revenues. If you follow my clumsy red circles on the above picture, it is easy to see why people were excited about the prospect of increased direct sales.
The company managed to double this twice in a row (Q1 and Q2 2020), but what is also clear is that they have hit the ceiling on how big portion of revenue can come from the direct channel, and in fact, they fell back to the range of ~30% for the second part of 2020.
Which is actually, quite surprising if we consider that they are tricked their customers into having an annual subscription by giving people a $100 discount IF they buy their newest GoPro from the companies website and IF they opt-in for the annual subscription.
This immediately explains why GoPro’s otherwise dull online subsription service that normally attracted about 15000 people a month suddenly enjoyed such a great boom in the new subscriber numbers. After all, people are not studid (well…), if you can buy something for $X or $X-$100 why would you choose the first option?
I have to admit that as someone who comes from a background in marketing, I am amazed by the skills of GoPro’s PR team who can masterfully wrap BS into something that sounds like actual results and sell it to the market.
And this ‘storytelling’ also continued in the company’s most recent earnings update, or more specifically, in their 2021 guidance. According to the company, their plan is to have 1 million subscribers by Q2 2021 and to reach 2 million by the end of this year.
Let’s take a quick look on how realistic this aspiration is.
The company had 370,000 subs before the launch of the Hero 9 in mid-Sept 2020, and this skyrocketed to 500,000 three weeks later. That’s ~43000 new subs per week. Now that we know that the company bundled together its newest flagship with the subscription, we understand why this big jump happened.
However, once the dust settled (read: most desperate fans bought the new camera) they grew the base from 500,000 to 761,000 by the end of 2020. But that’s only 21000 new subs per week.
The way I see it, there is a clear decline in the number of new subs and the main motivation for people to sign up was the new camera bundle in the first place. GoPro is looking forward to itsweakest quarters (Q1/Q2) and with no new flagship camera around till Q3, I can’t see what would drive new user to sign up. No, not the so-called ‘Mural’ feature, that is clearly a joke.
Not to mention that GoPro can only rely on those numbers and the resulting revenue if (and this is a very big IF) those users who have been tricked into having a one-year sub technically for free are renewing their service for $50 when its due.
So, to sum it up, my first main concern about the sustainability of GoPro’s ‘growth’ is that its ‘results’ are mostly based on a well-orchestrated marketing campaign and PR trick and not on real, solid improvement in its business.
And after all, now that we have the full 2020 results out, we know that GoPro’s revenues decline by roughly 30% YoY from ~1.2 billion to ~900 million (Red Flag #4). Those who are talking about ‘growth’ are clearly watching a different movie.
The GoPro Revolution – And The Lack Of It
I’ve mentioned at the beginning that GoPro’s biggest advantage eventually turned out to be its biggest caveat, and I think this statement requires a bit of an explanation. I try to keep this short and sweet because I have to accept that not everyone is a video-tech junkie as I am.
As said, GoPro was revolutionary at its time because it could manage to bring high quality video recording (selling point one) into a small and compact body that can be attached to virtually everywhere (selling point two). However, the problem with ‘revolutionary’ products is that the usually fail to beat the standard set by themselves.
In the case of GoPro, this is particularly true, because in order to meaningfully improve the performance of the camera (selling point one) engineers would need to go for a bigger housing and this would directly contradict the compact feature (selling point two). Plus, GoPro was a near perfect product at its inception, making it even harder to make it better.
Regardless, the company’s engineers did a great job and could manage to add decent features to the camera over the years, but the core concept remained the same: top quality video in a small body.
The evolution of GoPro’s flagship camera, the Hero line-up is full of great stuff, just think about the Hypersmooth feature introduced in Hero 7, the webcam capability of Hero 8 or the front-facing camera in the newest Hero 9.
Sure, resolution also increased from 1080p to 2.7K to 4K and now to 5K. But anyone who has a little knowledge about cameras knows that resolution is an overhyped feature.
The point is, that from an engineering point of view, it is becoming increasingly harder to pull out something that keeps GoPro’s audience excited. We’ve long passed the point when most GoPro users seriously question whether they need the new flagship once it gets released (usually Q3 every year).
So far, GoPro could get away with this mostly thanks to their world-class marketing, but I am afraid we are dangerously close to the stage where they eventually run out of tricks. The sales of cameras (on a per piece basis) is already in decline and unless they come up with something really badass, this decline is poised to accelerate.
But before I rush to such daunting conclusions, let’s take a quick look on what else stands in the way of GoPro’s surv… khm, growth.
Competition Is Bigger Than Ever
I appreciate that those who are bullish about GoPro mainly have their optimism around GoPro’s perceived moat, and that is it’s market domination, being virtually unrivalled in the action camera space.
This might have been true in the old days, as GoPro’s exponential growth between its 2010 debut and 2015 peak was hugely down to the fact that no one came even just close to pose a threat to their market domination, so they could happily swim around in their blue ocean. Furthermore, it has never been GoPro’s intention to compete with other camera brands like Canon, Nikon or Sony, and it is no accident these big guys never made an attempt to challenge GoPro in its own playground.
But all this came to an end in 2015, the only year when GoPro didn’t release a new flagship model. DJI saw this as an opportunity to launch its own action camera, the DJI Osmo Pocket that quickly proved itself to be a tough challenger. This not only clearly marked the beginning of GoPro’s decline, but also explains why Woodman and his team so stubbornly sticks to releasing a new camera every year since then.
Anyway, the real threat for GoPro’s market share isn’t DJI, nor a smaller copycat action camera brand.
Sadly for GoPro, the booming technology developments that brought better sensors, 4K recording and advanced video processing that went straight into the Hero lineup also significantly improved the cameras of smartphones, making them GoPro’s no.1 competitors, if not an existential threat.
After all, it makes little sense to purchase an additional (and not cheap) camera if you carry one in your pocket already. In fact, these days you carry three or even four, giving the increasing number of lenses found at the back of most phones.
And before anyone thinks that a GoPro has better quality video, I’ve got some bad news. Video-wise, everything that a GoPro offers are also packed in even mid-range smartphones, from 4K 60fps recording to decent stabilization and even more.
However, due to their compact and rugged design GoPros are harder to break, so those who prefer to jump out from airplanes in their free time would probably still lean towards having a GoPro.
But are these thrill seekers still the company’s main audience as many tend to believe? Actually, the recent ‘improvements’ in the GoPro Hero9 suggest otherwise. The introduction of a front screen indicates that GoPro is shifting its attention from those who do the action towards those who only talk about it, and, this bring us to an important question:
Who buys GoPro these days?
Instead of focusing on adrenaline-junkies, it seems that nowadays GoPros are aimed at vloggers (pun intended), Youtube video creators and the self-proclaimed filmmakers.
In other words, GoPro’s are increasingly intended for grown-ups with a creative vain, child-like spirit, and too much free time (like me, except the free time). The problem with this type of customer base is that despite they have a strong inner urge to own the latest edition of any gadget they don’t always can afford it.
During such difficult economic times when millions are out of work, forking out $3-400 for something like an action camera isn’t on the top of many people’s list. There are must-to-haves, good-to-haves, but GoPro is more like a fun-to-have.
Even serious videographers have no real use of a GoPro because, well, essentially it's a toy. Yes, it is great in some scenarios but it will never, ever replace a professional camera gear.
The very fact that it is difficult to clearly determine who will buy GoPro’s product is yet another blow to the sustainability of company’s business model.
What future may hold for GoPro?
The way I see it, if GoPro wants to fulfill its aspiration for growth then they urgently need to come up with a new ‘trick’.
Engineers and marketers are probably working their balls and tits off to come up with something that could help sell the next flagship, but this places the company and its product development teams in a tricky situation.
The better improvements they pour into their next camera the harder it gets next time to go above it and beat the expectations. But, if they intentionally hold back some of their innovative gunpowder to use it later they basically risk that the launch might go sideways.
GoPro is under huge pressure to deliver and they can’t risk to come up with a camera that turns out to be unworthy for an upgrade.
As a long-time GoPro user myself, I was thinking hard about what sort of improvement or extra would make me to open my wallet and with all my honesty, nothing comes to my mind (within reason). I firmly believe that GoPro, and the action camera itself, have reached its limits.
Regardless, I am sure GoPro will have at least one more shot to prove me wrong, and my sixth sense tells me it will be called GoPro Hero X, with 8K recording and Hypersmooth 4.0 and whatnot.
Summary
I’ve already brought up a few very serious Red Flags about the company, but of course, the picture wouldn’t be complete without a few optimistic signs.
The way I see it, investors have two green flags to hold onto, one is the companies current cash situation and the other is the prospect of a potential buyout.
Although I see little probability for the latter (if someone was interested, they could have acquire GoPro when a) the have been much more promising or b) when they have been much cheaper) we can never discard this option.
In regards to the cash situation, considering the companies track record of burning cash I see the current status quo as a last chance to use the available cash meaningfully. The riskier option is to spend it on some proper R&D and come up with something that could bring fresh blood into the product line or, and this would be more desirable to investors, if they use some of this money for share buybacks.
Either way, GoPro might enjoy have enjoyed an increased attention and bullish hype lately that mostly stems from their recent marketing shenanigans, but make no mistake, behind the masterfully maintained brand image GoPro is a struggling company.
The company’s decline is dragging on for years and a few extra paid subscribers should not be confused with a reversal of trends or with a resurrection.
Numbers paint a clear picture about the current demand for GoPro’s products, making them just enough to keep the company going, and on the top of this, their future outlook also gives little reason for optimism. The disappointing Q4 results shows clearly that the ‘music is getting slower’, and I anticipate an even more disappointing Q1 and Q2 ahead.
Despite I think it is a bit too early to talk about chances of going out of business, I am afraid without a meaningful reinvention or a miraculous acquisition we won’t have the chance to put our hands on a GoPro 11 or 12.
Because of all the above risks and challenges ahead it seems to me that one has to be an adrenaline junkie not only to make a good use of a GoPro, but also to invest in the company.
Update 26/02/2021: In the recent month since GoPro released its Q4 results the stock was trading pretty much in sideways, clearly indicating that the market doesn't really know whether it should be bullish or bearish towards the company. For me, this is clearly a bearish sign, because if this market doesn't find anything bullish in a company, it is a bad omen.
Plus, looming chip shortages could cause huge headaches for GoPro, representing another red flag for investors.
In the last 12 months I’ve held numerous short and long positions in GoPro, resulting in about 20% combined profit. At the moment, I’ve no opened position in the company but will establish one as soon as the market circumstances allow it.
I am not a financial advisor, just an ordinary guy who invests based on logic and common sense. The above shouldn’t be considered as investment advice but rather summary of my own research and conclusions.
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