Moore’s Law has a dark side. The acceleration of technology means niche products quickly become commodities. In the case of GoPro Inc (NASDAQ:GPRO), it meant that a cheap, sturdy video camera that could be mounted on a cyclist’s head became too cheap to remain profitable.
Source: ETC-USC via Flickr (Modified)
GoPro CEO and founder Nicholas Woodman saw this coming, but instead of seeking to build a market in other, more expensive cameras that might “see” waves other than visible light, he decided to mount his commodity cameras on more complex devices, namely drones.
In doing so, GPRO became a small, high-priced competitor to a company with lower costs, SZ DJI Technology Co. Now, GoPro is getting crushed on the one hand by its commodity nature, and on the other hand by a competitor with lower costs and more capital.
This is not a good place for GoPro stock to be.
We Saw It Coming
Analysts saw this coming. The average rating on GoPro stock has been “underweight” for months, with more screaming sell than buy, even as shares have plunged more than 50% since last October.
GoPro is expected to report another bad quarter on July 26 — losses of approximately $50 million, or 35 cents per share, on revenue of $243.59 million. Bulls will note that represents 10% growth over last year, and fewer losses, but the problems here are more fundamental.
Most InvestorPlace writers are telling readers to go away. James Brumley recently called the stock “a one hit wonder.” Tom Taulli said the creative magic is “long gone.” Ryan Fuhrman called it a “real buzz kill.”
Only Richard Saintvilus sees any hope, mainly in the company’s software. The drone market is growing rapidly, and content sharing through GPRO software holds promise. With a market cap now lower than its annual sales, albeit solid sales, he holds out for hope of a second-half rebound.
Most of the opportunity in the drone market lies in heavy commercial and military drones, the kind that can drop packages and bombs, rather than in the lightweight, consumer, camera-focused drones that GoPro makes.
But, that does bring up a promising path forward, should GoPro choose to take it. I don’t buy stocks based on an assumption that management will change course, but if GPRO did shift its focus, stockholders would benefit.
Hope in a Sale
GoPro should put itself up for sale.
There are going to be big markets in selling sensor drones to the industry, long-range drones to law enforcement and public safety agencies, and military drones. The problem is that GoPro, as currently structured, is in no position to pursue those markets.
But, Lockheed Martin Corporation (NYSE:LMT) is structured that way. So is Northrup Grumman Corporation (NYSE:NOC). And Boeing Co (NYSE:BA). If you were to combine GoPro’s present areas of expertise with better avionics — and the capital required to fit higher-end sensor and multi-bandwidth camera arrays on its drones — there could be a bright future for this American player in the heavy-duty commercial and military drone arena.
If GoPro’s future is as a drone manufacturer, the company should go where that market is going, which is public safety and military applications. Right now, GPRO is mainly an OEM for Ambarella Inc (NASDAQ:AMBA), the semiconductor company from which it gets its camera chips, yet AMBA has problems of its own, with shares having fallen about 20% since the last week of May.
This is the dark side of Moore’s Law. Niches don’t last, and the capital costs of pursuing new ones are often greater than a niche company can generate. To win as a technology investor, you need to know when to fold and walk away.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
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