GoPro stock plummeted today following last night’s disappointing earnings report. As of this writing, shares were down 15.06% at $25.66 per share and still tumbling, dropping dangerously close to the initial public offering price of $24 per share.

GoPro

At least two firms downgraded GoPro following the company’s earnings call last night, and a third slashed its target price by more than half.

Piper Jaffray downgrades GoPro to Underweight

In a report dated Oct. 29, Piper Jaffray Senior Research Analyst Erinn Murphy said she expects GoPro stock to continue falling and that she is especially cautious now following last night’s earnings call. As a result, she downgraded the stock from Neutral to Underweight and set a price target of $20 per share. This is the second time she has cut her price target for the company this month.

GoPro’s reported third quarter revenue was $30 million below the low end of management’s guidance, and fourth quarter revenue guidance was between $500 million and $550 million, compared to the consensus estimate of $688 million. Management guided for earnings of between 35 cents and 45 cents per share—well below the consensus estimate of 82 cents per share.

Structural problems at GoPro

Murphy reminded investors that they saw signs of “moderating” demand for GoPro’s cameras among consumers in their recent survey. She also raised a number of other red flags, like the 147% year over year increase in inventory levels and “severe reversal of sales trends,” which she thinks will keep investors from buying more shares in the action camera maker. GoPro sold 1.6 million units during the third quarter, which came up well short of Murphy’s estimate of 1.86 million. She said this suggests that pricing fell by about 3%.

Over time, she expects direct sales to top wholesale sales, as direct sales made up 52% of total sales and increased 2% year over year. She noted also that wholesale growth increased 126% year over year.

GoPro’s sales by region

Looking at GoPro’s results on a geographical basis, the analyst noted that the strongest growth was in Europe, the Middle East and Africa where sales climbed 179% compared to last year. She reminded investors that last year’s HERO4 began shipping in the region during the fourth quarter compared to the third quarter in the U.S. As a result, the comparison for the region was easier during the third quarter but becomes more difficult in the fourth quarter.

Sales in the Asia Pacific region increased 178% year over year, while sales on GoPro’s home turf in the Americas declined 7% compared to last year.

Expectations may be too high

The Piper Jaffray analyst thinks Wall Street is still expecting too much out of GoPro for the fourth quarter. Company management expects the Americas and the direct sales channel to show the strongest growth rates. Further, they expect the weak sales trends for the Session camera to reverse.

However, Murphy sees this as being challenging because GoPro isn’t releasing any new products before the end of the year. Also the fourth quarter marks difficult comparisons with last year because of the “lapping of strong in-demand new product.”

The analyst has been tracking sales of GoPro’s cameras on Amazon and found that so far this quarter, the company’s average rank has declined from 71 last quarter to 81 this quarter. In the second quarter, GoPro cameras were in 52nd place. Further, she thinks it could take “longer than a few months” to clear all the inventory that’s in the company’s channel right now.

As a result of all these issues, she thinks GoPro might miss guidance yet again in the fourth quarter.

Cowen downgrades GoPro also

Cowen and Company analyst Robert Stone downgraded GoPro from Outperform to Market Perform and slashed their price target from $60 to $24 per share. He also mentioned the inventory overhang, adding that inventory levels were “apparently much leaner” entering last year’s fourth quarter. The amount of inventory on GoPro’s balance sheet climbed from about 88 days in the second quarter to 122 in the third quarter. In last year’s third quarter, the company had about 68 days of inventory on its balance sheet.

Stone noted that the gross margin slightly ahead of Wall Street’s estimate, coming in at 46.8% compared to the consensus of 46%. However, he also noted that the margin suggests GoPro is selling a greater mix of the less expensive and entry level cameras compared to the more high-end cameras. Nonetheless, the slight beat on margins suggests that the mix was skewed slightly more toward the high-end models than Wall Street was expecting, as the company took a hit of 200 basis points from the $100 reduction in the retail price of the Session.

GoPro’s spending to rise

The Cowen analyst expects GoPro’s spending to continue rising with research and development and sales and marketing expenses driving it. Management guided for between $160 million and $170 million in expenses for the fourth quarter, which would be about 31.4% of sales.

Of course the higher expenses will cut GoPro’s operating margins, probably to the low teens, Stone believes, unless GoPro can accelerate its sales again.

GoPro’s software presents future opportunities

One area where GoPro can improve the stickiness of its products is through software, and Stone expects the improvements to the software to come gradually rather than in one “big bank.” He believes improving the software solution and keeping it exclusive to the company’s cameras is very important in enabling it to sustain its position in the action camera market while also attracting more casual users.

Further, the analyst thinks the timeframe for finishing the software may also determine when GoPro releases its drone, which is expected during the first half of next year.

Some analysts see light at the end of the tunnel

Northland Capital analyst Gus Richard maintained his Outperform rating on GoPro but slashed his price target from $80 to $39 per share. He said that even though the results were “much worse than feared,” he expects this setback to be only temporary.