The consumer tech market has a hardware problem

While GoPro (GPRO) fell 9% after reporting a first quarter loss off $0.63 on Thursday. The stock, which has fallen over 75% in the last year, remains vulnerable to a trend plaguing a broader range of tech companies: Lackluster hardware growth.

Demand concerns and market size question marks have pushed the stock to $11 per share, with looming worries that all hardware becomes commoditized, as Barclays pointed out in a recent note. With the pressure to create the “next best thing” for its Hero cameras remaining high, the company recently hired one of one of Apple’s (AAPL) designer to help fuel innovation. But investors haven't cozied up to the company's new launches, and announcement to delay its drone adds further questions.

The dwindling bull calls for the stock focus on potential for software, which has historically garnered higher market multiples. The GoPro management team has made efforts to monetize its media content including its youtube channel, but has had little to show in terms of traction.

Fitbit (FIT), which fell over 15% on Thursday after its first quarter report, faces a similar “hardware problem.”  While new models like the Blaze and Alta helped first quarter results, as they sold over 1 million units each in their first month of availability, disappointing second quarter guidance reflects high levels of marketing and R&D spending to increase innovation and fuel revenue growth from new products this year.

Hardware versus software

Hardware companies have had to contend with muted valuation multiples because of commoditization risk. HP Inc (HPQ)--the portion of the former Hewlett Packard that focuses on printers and hardware--trades at 7x forward P/E. Semiconductor company Intel (INTC) stands at 11x and the now-controversial Apple (AAPL) currently trades at 10x. Meanwhile, software names like Microsoft (MSFT), Oracle (ORCL), and SAP (SAP) trade with P/Es in the mid-to-high teens and hyper growth software names like Salesforce.com (CRM) garnering higher multiples.

Apple, which has for years has resisted hardware commoditization, is now finding itself plagued by concerns over its product cycle. The stock has fallen 15% to $93 per share in just the last month. And while signs of a less robust market have been lingering over the past year, in last week’s first quarter report, Apple Tim Cook CEO reported the company’s first quarterly sales decline in 13 years.  “I think the smartphone market is mature, I think that the market, as you know, is currently not growing,” Cook said on the conference call. With pressure high for the iPhone 7 launch this fall, along with new products like the Apple watch, lingering concerns about growth in the U.S. as well as abroad in China plague the stock.

The bottom line: It’s hard to be a hardware company these days. Meanwhile, tech companies that offer a platform and service--and are less reliant on a product cycle--have been surging.  Facebook (FB), Alphabet (GOOGL), Amazon (AMZN) are up 52%, 32% and 58% over the last year.