Shares of GoPro entered another nosedive today after Morgan Stanley analysts issued a report saying that the company is now in danger of falling into just a small niche without much growth. The stock fell as much as 8.37% to $28.08 per share within just a couple of hours. Today’s decline continues what’s now becoming a long-running trend for GoPro shares, as they have fallen by more than 23% since early September.

GoPro’s stock price is now dangerously close to the $25 per share mark prophesied in a Barron’s article from last month.

GoPro Inc Stock Crashes After MS Cuts Target Almost In Half

Weak Session sales suggest more disappointments ahead

In a report dated today, Morgan Stanley analyst James Faucette and his team said they think the weak performance of GoPro’s newest camera, the Session, is sounding the alarm for more trouble to come. The report is only the latest in a string of analyst reports highlighting the camera’s weak sales. Because of the weak Session sales, they slashed their price target from $62 to $35 per share, although they maintained their Equal-weight rating on the stock.

Not long after GoPro released the HERO4 Session, they spoke with sales associates who questioned whether there was enough of a feature tradeoff to make up for its smaller size. After following up later, they discovered that customers do indeed prefer the Silver model, which offers better video quality and features an LCD screen, over the Session, which is simply a smaller camera.

GoPro management also recently warned that the Session has not been selling as well as their previous models at the same price point as the Silver because consumers continue to favor the Silver. As a result of the weak sales, GoPro slashed the price of its Session cameras from $399 to 299 in an effort to spur demand and clear out inventory. The camera has only been on the market since July.

Call for GoPro to improve software faster

Faucette also said they’ve been disappointed with the development of GoPro’s software. He added that while the company has indeed made some improvements, he doesn’t think those improvements are coming fast enough. In fact, he’s concerned about smartphones because he doesn’t see enough differentiation between the video editing software that’s available on smartphones and GoPro’s software.

Since he started covering GoPro, he expressed concern that a major barrier to mass market adoption for GoPro is usability. He does think the camera manufacturer is moving in the right direction with the improvements in editing and video sharing, but he thinks they’re not on par with the video editing apps that are available for iOS and Android.

Not enough differentiation for GoPro

He thinks GoPro will struggle to convince consumers to buy its cameras because there aren’t enough differences between the available software, and as a result, he’s starting to think GoPro’s cameras will stay tucked into a “niche alternative” to smartphones. He also thinks growth will keep slowing and end up in line with the growth of the broader digital video camera market.

Further, he’s concerned that GoPro’s chance to set itself apart in software is an especially big burden because all of the consumer electronics industry is struggling with the problems of editing and sharing high-definition videos taken on mobile devices.

GoPro’s media brand not picking up steam

GoPro bulls have long been emphasizing the company’s progress in media as it builds up its YouTube channel and Instagram account. Faucette believes that penetration and slowing growth rates will probably mean that monetization on both media and software will remain limited and too small to “move the needle” compared to the company’s camera business.

He sees media and software as being just a part of GoPro’s costs in developing its brand and platform, so attempting to charge directly for them could further impede consumer adoption. This is especially a concern right now as GoPro must look for ways to ease the friction in this respect to convince more consumers to buy its products.

GoPro estimates cut

The Morgan Stanley team reduced their sales and gross margin estimates because of the weak Session demand, which resulted in their massive price target cut. They’re also increasing their estimates for operating expenditures to account for higher marketing expenses as GoPro attempts to spur demand and pours money and resources into developing its quadcopter.

Faucette and company now expect third quarter earnings of 21 cents per share and sales of $424 million, compared to their previous estimates of 31 cents per share and $444 million in revenue. For the full year, they expect earnings of $1.39 per share and $1.9 billion in sales. Their previous full year estimates were $1.80 per share and $2 billion in sales.

For next year, they cut their revenue estimate from $2.3 billion to $2.2 billion and their earnings per share estimate from $2.15 to $1.76 per share. Morgan Stanley’s bearish comments stand in stark contrast to a report in Barron’s that suggested the company will bounce back next year.

Still a chance in drones

One area in which they think GoPro’s opportunity remains “intact” is the quadcopter it is currently developing. They have thus far “conservatively” built it into next year’s estimates. They’re projecting 300,000 units and $150 million in drone revenue for GoPro next year.

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