GoPro is set to unveil its Karma drone on Monday, and the company is greatly in need of a new hit product. Bank of America Merrill Lynch says the action camera maker’s stock is a Buy based on the huge potential in the drone market. The firm’s analysts initiated coverage of GoPro with a $19 per share price objective in a report dated September 19.

GoPro Hero Action Camera Logo
Image Source: GoPro Press Kit

What’s to like about GoPro?

Analysts Jason Mitchell and Nat Schindler see plenty to like about GoPro despite the bearish calls coming from much of the rest of Wal Street. They note that the company has sold more than 20 million cameras so far and has the market’s top six leading cameras. Its brand is especially strong in the area of extreme sports, as it has more than 1 billion YouTube video views and co-sponsors events with hundreds of high-profile athletes and partners such as Red Bull.

The BAML team likes GoPro’s upcoming product cycle, which begins with the Hero5 camera series. They also like the fact that the next line of cameras is connected to the cloud, as they believe this opens the door to monetization of its cloud platform. Further, they point out that GoPro’s channel inventory has declined dramatically and thus should allow for “normalized channel sell-in” in the fourth quarter.

GoPro

And finally, they believe the Karma Drone accessory will be able to sell enough to beat Wall Street’s estimates.

GoPro faces risks, but products and Karma being discounted

Mitchell and Schindler are going into GoPro with eyes wide open, however, as they do admit there are several risks to it. For example, the total digital camera and camcorder end market is shrinking, which could pressure the core products. Also the action camera market is being flooded with new competition, and low-end cameras and smartphones are placing pressure. However, they add that these downward pressures are long-term and that they are for the entire industry; thus, they are not specific to GoPro.

On the flip side, they see opportunities in the near term based on the upcoming product cycle. They note that Wall Street estimates $1.7 billion in revenue for GoPro’s fiscal 2017. They’re meaningfully ahead of consensus at $1.85 billion, and they believe consensus is discounting the opportunity the company has in the drone market and its potential in fiscal 2017. They note that search trends point to high interest in GoPro’s Karma:

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The BAML team believes that most of the negative news surrounding the company is already built into its stock right now. In fact, they think sentiment is so low that it won’t take much for Karma sales to beat estimates. Further, short interest is high, and as such, they see near- to intermediate-term opportunity for investors who want to play to upcoming product cycle.

GoPro’s drone unveiling set for Monday

Drone and GoPro enthusiasts have had plenty of time to whet their appetite for the Karma, and we will finally see the finished product on Monday. The big event is scheduled for 10:30 Pacific / 1:30 Eastern. According to the Los Angeles Times, analysts expect GoPro to unveil a small drone that carries a camera and is able to automatically trail the user. Like the company’s other products, it is expected to specifically target the extreme sports niche. After all, members of this group were the early adopters of GoPro’s wearable cameras, so it would make sense that there would be something in it for them.

However, very little about the Karma has been leaked, so either people aren’t as interested as the media makes them out to be, or GoPro has done an exceptional job at keeping a lid on things. The teaser videos the company has released do suggest that the drone is smaller than those made by other drone makers. It’s also apparently designed for image stabilization and can be “maneuvered in tight spaces,” said Oppenheimer analyst Andrew Uerkwitz in a recent report.

Wedbush analyst Michael Pachter expects the Karma to sync using a clip that attaches to the user’s clothing or body, enabling it to track them without the use of a controller. It’s expected to be compatible with the Hero5, which is also expected to be unveiled on Monday, and its pricing and battery life will be key components of whether it has a prayer of ever catching on. Dougherty analysts warned this week that the Karma, with camera, could end up costing over $1,000, which might be too much.

Shares of GoPro rose as much as 4.46% to $14.77 during regular trading hours on Friday.

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