After rallying on Friday, GoPro shares took a dive on Monday following a big downgrade from analysts at Bank of America Merrill Lynch. The action camera maker reported such an atrocious third quarter on Thursday that it halted trading on its shares before releasing the results. Now the holiday shopping quarter becomes even more important for GoPro as it attempts to keep the boat afloat.
GoPro downgraded to Underperform
In a report dated Nov. 7, BAML analyst Jason Mitchell said he downgraded GoPro two notches from Buy to Underperform and slashed his price objective from $17 to $10 per share. He noted that the company said manufacturing problems prevented it from supplying enough Hero5 Black cameras in the third quarter. What’s even worse is that the same problems will likely keep GoPro from being able to fill its inventory channels in the fourth quarter.
The company launched its Hero5 cameras on Oct. 2, although the quarter it just reported ended on Sept. 30. Mitchell warns that the manufacturing problems not only meant that GoPro wasn’t able to ship enough new cameras in time for the launch date but could also mean that its holiday sales are at risk. He feels that the botched launch will shake the confidence of fans, investors and retailers in the company and is now projecting camera unit sales of 2 million to 2.1 million in the fourth quarter, which would be about flat with last year.
GoPro’s guidance at risk
The analyst believes investors will be skeptical about whether the company can grow its unit sales in the long term even though it has greatly expanded its distribution. He said that in order to turn sentiment around, the company must execute well and show that it can grow unit numbers beyond where they were in fiscal 2014. He noted also that management’s outlook still implies that the holiday shopping quarter will bring in about half of fiscal 2016’s revenue, so he believes investors will see risk to this guidance “and likely keep GoPro in the penalty box until the focus switches to cost cutting and new products in FY17.”
FBN Securities analyst Shebly Seyrafi noted that the camera expects to grow its sales by a double-digit percentage in fiscal 2017 and be profitable but also warned that the company’s “embedded guide” looks far lower than what the Street was expecting. He reiterated his Sector Perform rating but slashed his price target for GoPro from $15 to $11 per share in a note dated Nov. 4.
The company guided for between $600 million and $650 million in sales for the fourth quarter and non-GAAP earnings of 25 cents to 35 cents per share.
Looking past supply constraints
Wedbush analyst Nick McKay reiterated his Outperform rating but cut his price target for GoPro from $17.50 to $12 per share in a note dated Nov. 4. He seems to think that the features of the Hero5 cameras and Karma drone are compelling enough and that the company’s brand is strong enough that they will overcome the early supply constraints.
He noted that demand for the new products seems to be “brisk” despite the constrained supply. He attributes this to pent-up demand because it’s been two years since the company released new high-end cameras. Originally, the company released new flagship cameras every year.
Shares of GoPro stock slumped by as much as 5.71% to $10.52 during regular trading hours on Monday.