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Don't Try to Catch a Falling Knife

- By Harsh Jain

Action camera specialist GoPro Inc. (GPRO) ended 2016 in the red as the stock was down more than 50%. Moreover, the stock is off to a bad start heading into 2017. GoPro's downturn started after reaching its all-time high in late 2014 and it is likely the company will continue facing severe problems in the coming years.

GoPro announced fourth-quarter results in February. For the quarter, the company reported earnings per share of 29 cents, beating the estimates by seven cents. On the other hand, revenue came in at $540 million, missing the consensus by approximately $34 million.

That figure, however, signifies an increase of 23.8% compared to -31.1% in the same quarter a year ago. For the year, the company's sales were down 27%.

GoPro is popular for its action cameras, but the rise of high-end smartphones appears to be a strong source of competition for the company going forward. Nowadays, high-end smartphones such as Samsung Galaxy S7 Edge, Apple iPhone 7 Plus and others have high-quality cameras, which are in some ways better than the GoPro cameras.

Furthermore, most of the high-end smartphones nowadays have waterproof certifications also which enable them to take pictures underwater. As a consequence, mainstream users most likely have a better option of buying a high-end smartphone instead of buying an action camera to capture everyday activities.

On the other hand, after delays followed by an early recall, the company finally reintroduced its Karma drone on Feb. 1. It is not likely the drone will be able to gain a strong position in the market due to tough competition and superior products.

Management detailed it expects revenue to be around $200 million for the next quarter, significantly below the estimates of $265 million.

Moreover, the company is making several moves to lower its operating expenses, but it does not look like the restructuring will pave the way back to profitability.

Summing up

GoPro disappointed investors in 2016 and it seems like the company will continue to do so in the future. Its Karma drone, priced at $799.99, with comparatively fewer features compared to competing products, which clearly indicates the company needs to work on its pricing strategy to compete effectively against rivals.

Moreover, with time, the cameras being used in smartphones will continue to improve, which will be an even bigger problem for GoPro's action cameras. To overcome the growing smartphone threat, the company needs to develop an attractive product that could appeal to mainstream users.

The stock was also downgraded to underperform at Raymond James as well as Baird in February. Currently, the company's path back to profitability looks uncertain and I would recommend investors stay away from the stock.

Disclosure: No position in the stocks mentioned in this article.

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This article first appeared on GuruFocus.