GoPro Shares Tank 15% After Big Q2 Earnings Beat

Zacks

Shares of GoPro Inc. (GPRO) fell 15% to close at $40.97 following the release of second-quarter 2014 results on Jul 31. This substantial decline can be attributed to expectations of upbeat earnings, a lack of clarity about the revenue potential of the company’s video offerings and typical volatility in the shares of a company that just had its IPO.

Quarterly Results Were Strong

On Jul 31, 2014, GoPro released its first quarterly earnings since it went public in June this year. The company reported second-quarter fiscal 2014 adjusted earnings of 8 cents a share. This compared favorably with the Zacks Estimate of a loss of 12 cents a share. Quarterly earnings also improved significantly from the loss of 3 cents reported in the prior-year quarter.

Further, second-quarter revenues increased 38.1% year over year to $244.6 million from $177.1 million in the year-earlier quarter. Revenues also surpassed average analysts’ expectation of $238.1 million.

Nevertheless, analysts believe that though the company’s results surpassed expectations, the sequential improvement in the financials was marginal and did not justify the premium valuation, especially considering the fact that it operated in a niche segment.

Uncertainty About Video Revenue Persists

This apart, the company’s optimism surrounding video sales stems from a 200% year-over-year increase in video views on YouTube. This has been considered a headwind instead of an opportunity by analysts as GoPro does not own the videos it markets and therefore the revenues generated will be shared.

Further, as per its agreement with Virgin America, GoPro provides videos for free which further affects its revenues. Also, the company’s GoPro Channel is the only source of revenue which again is not expected to contribute significantly.

Meanwhile, the company’s stock has seen rough times since its IPO on Jun 26, 2014.

Conclusion

GoPro has been in the limelight since its debut in June. And all throughout, there have been many positive and negative opinions on the company’s performance. (Read GoPro Gains 13% on Positive Coverage Initiation by JMP Group). However, GoPro’s portable cameras command a strong market share and enjoy substantial demand, especially from sportsmen or sky divers.

GoPro currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Skullcandy, Inc. (SKUL), Dolby Laboratories, Inc. (DLB) and Panasonic Corp. (PCRFY). While both Skullcandy and Dolby Laboratories sport a Zacks Rank #1 (Strong Buy), Panasonic Corp. carries a Zacks Rank #2 (Buy).

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