GoPro Discounts, FX Headwinds Could Signal Margin Pressure

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GoPro could be in for another tough quarter, with the discounts being offered on its flagship camera and also with higher international sales mix bringing foreign exchange headwinds.

GoPro, Inc. (GPRO) shares have declined almost 30% this year. The adventure camera maker faces increasing skepticism about its future as more competitors emerge in a growing market for point-of-view cameras. The company is set to report earnings for the first quarter of fiscal 2015 (1QFY15) on Tuesday, April 28. While some analysts still expect GoPro to maintain sales momentum, investors have been concerned about a couple of factors that signal potential weakness ahead and could lead to falling margins as well as a decline in market share.

Electronics retailer, Best Buy, is currently offering the Hero 4 Silver at a 7.5% discount in all its retail outlets across the US. The promotion is set to run its course till May 2. However, analysts at Pacific Crest have noted today that Best Buy has not been aggressively advertising the offer. This points to two possibilities: either Best Buy is using it as a counter measure to a similar offering made by Amazon.com Inc. (AMZN) recently, or perhaps the demand for the Hero 4 is declining.

If it is the latter, it would signal an underlying weakness in GoPro sales for the rest of the year, and other retailers could gradually move to slash prices on the Hero 4. Pacific Crest analyst, Brad Erickson said: “We do not see any impact from this type of a one off finding, but if we see further evidence of discounting it could start fueling the bears’ commoditization thesis.”

A decline in the Hero 4 Silver’s pricing could put significant pressure on GoPro’s overall margins this year, especially if the discounts are a result of softer demand. The Hero 4 Black commands premium margins, and any pricing weakness would lead to investor concerns about falling margins

In a recently published research note, Citigroup analysts have also expressed concern over GoPro’s cost discipline. Citi is concerned as job openings at the company have surged by 100% since the company reported results for the December quarter. With GoPro’s flagship device losing popularity among consumers while incurring increasing long-term expense, the company’s margins could contract considerably in the short run.  Citi subsequently forecasts GoPro’s gross margins for the March quarter to come in at 40%, down sequentially, from 48% in the fourth quarter of 2014. This is also below the Street’s consensus of 44% for gross margins.

While the impact of these headwinds will become more obvious in the full-year performance, a lot of analysts still expect the company to post year-over-year growth in its upcoming quarterly earnings release. According to consensus estimates, the company’s revenue will rise 45% year-over-year (YoY) to come in at $341 million. Likewise, net income, which is estimated at 18 cents per share, would reflect 10% YoY growth. Analysts at Pacific Crest believe that GoPro would surpass consensus estimates for both revenue and earnings. The sell-side firm has a Sector Weight rating on GoPro stock.

However, there is another major caveat up ahead: a strong dollar, which has impacted almost every US corporation that sells products and services abroad. GoPro is expected to significantly increase its international sales mix. In the fourth quarter of 2014, the company disclosed that just over 65% of its revenue was generated in the US; the figure is down from the third quarter of last year, when around 73% of its revenue came from the US.  As the revenue stream shifts overseas, the strong dollar could prove to be a more noticeable drag on revenue.

Demand for GoPro’s cameras has been growing in regions such as Asia-Pacific and Europe. However, with the US dollar having appreciated substantially in the last quarter, those revenue gains from abroad could be subdued, with a significant negative impact on margins.

Another potential headwind is that GoPro no longer remains the only action camera brand on the market, with Chinese smartphone maker Xiaomi also having launched an affordable entry-level rival. This could take some of GoPro’s lower-end market share.

In a recent Bloomberg poll, eight analysts rate GoPro stock a Buy, six advocate a Hold, and two rate it a Sell. The average 12-month price target on GoPro stock is $62.