Stocks

GoPro Inc Shares Rise Despite HERO4 Session Concerns

GoPro shares rose more than 12% over the last two trading days, including an increase of more than 3% today which brought the stock as high as $36.92 per share before pulling back. They still remain down a lot, however, as just last month the stock was trading at close to $65 per share.

GoPro

The company’s new HERO4 Session camera is off to a slow start after its launch on July 12, and investors have been worried about that, although most analysts aren’t concerned. In fact, Citi analysts think this recent pullback in GoPro’s share price represents an attractive entry point.

GoPro management warns about HERO4 Session sales

In a report dated Sept. 16, analyst Jeremy David blamed the pullback on concerns about weak early demand for the HERO4 Session camera. One thing he doesn’t mention is the weak results from supplier Ambarella, which also helped send GoPro shares tumbling earlier this month. GoPro Chief Financial Officer Jack Lazar confirmed at last week’s Global Tech Conference hosted by Citi that sales of the Session are off to a slow start.

David cut his estimates for the second half of this year and the first quarter of 2016 as a result of the slow sales ramp. However, after the first quarter of 2016, his estimates remain the same because he thinks GoPro’s long term fundamentals are fine.

GoPro estimates cut

For the third quarter, David is estimating $425 million in revenue for GoPro compared to his previous estimate of $438 million and $5 million below the low end of management’s guidance for revenue of between $430 million and $445 million. His fourth quarter ales estimate moves from $737 million all the way down to $560 million. The Wall Street consensus estimate is $708 million for the fourth quarter.

He also reduced his earnings per share estimates dramatically lower, including not only worse than expected sales but also increased marketing expenses. He now estimates earnings of 27 cents per share for the third quarter, compared to his previous estimate of 30 cents and GoPro’s guidance of between 29 cents and 32 cents per share. For the fourth quarter, he expects 52 cents per share compared to his previous estimate of 96 cents per share. The Wall Street consensus estimate of fourth quarter earnings is 91 cents per share.

GoPro to benefit from drone camera sales

Even though the analyst’s near term estimates are below consensus, he’s quite a bit ahead of consensus for his 2016 and 2017 full year estimates. The main reason is because he’s very bullish on GoPro’s opportunity in flying cameras. He also expects to see continued modest growth in the area of action cameras, the company’s bread and butter.

He doesn’t believe the slower than expected sales growth in the near term indicates long term issues. Also he thinks the bear case of declines in average selling prices and gross margin appears unlikely because potential competitors are “fading away.”

What’s priced in?

David believes Wall Street is already pricing in a third quarter revenue miss and a weak fourth quarter guide. Unfortunately though he doesn’t see an upside until after that fourth quarter guide resets expectations lower. After the third quarter earnings report, he sees the potential for upside from next year’s launches, which he believes will be GoPro’s biggest ever.

The company has already said it’s working on a drone, and David said there will likely be a flying camera in the first half of next year. Also the HERO5 camera, GoPro’s next flagship, is expected in spring or early summer 2016.

The analyst continues to rate GoPro as a Buy with a $90 per share price target.