The Hype Around Karma Relaunch
Apart from strong fourth quarter estimates, what got investors excited were estimates of sales for Karma drone. In the report, Erickson also stated that he expects GoPro to re-launch Karma in Q2 and estimates GoPro to sell around 150,000 drones, earning the company additional revenue of $88 million. While the launch of Karma will definitely bring in additional revenue, it is far from clear what will be the size of the revenue. It will be advisable for investors to wait and watch how the re-launch plays out.
While the opportunity in the consumer drone market is huge – it is estimated to reach a size of $4.19 billion by 2024 – so are the risks (2). The heavy competition, entry of low cost manufacturers and commoditization of the drone market has put heavy pressure on margins. Parrot SA, the second largest manufacturer of non-military drones had to chop a third of its work force due to “insufficient margins” and weak sales. The drone market is heavily dominated by Chines drone manufacturer DJI. GoPro might find it very difficult to compete with DJI, since DJI is a well known brand in this field and its recently launched “Mavic Pro” outperforms Karma on several fronts. In spite of the hype surrounding the Karma drone, GoPro was only able to sell 2500 units in the two weeks before its recall. This number is quite low even after accounting for supply side issues. And that was before the recall.
This doesn’t mean that GoPro may not able to sell the drones at all. The company has a strong, loyal following and brand image. Also, the Karma is likely to enjoy strong demand from the existing owners of Hero Cameras. However, a runaway success for this product is far from assured.
Should You Buy GoPro Stock Now?
Yesterday’s report from Pacific Crest was much awaited by GoPro stockholders who have seen their stock heavily underperform the market in the last one year. The bearish sentiment around the stock has been crystallizing since the recall of GoPro’s Karma drones, as can be seen from the rising short interest. But in spite of the slightly bullish report, GoPro stock remains a risky bet. No doubt, Hero Cameras are the best in their segment by far, but there are concerns emerging that the action camera market itself may be saturated and the success of Karma drones are far from a given. In the same report, Mr. Erickson has stated that (3):
“While 4Q16 and early 2017 will likely show some growth given how GoPro under-shipped the channel in 2016 due to excess inventory,” , “this near-term dynamic does not change our longer-term view that this market is saturated.”
GoPro Inc (NASDAQ:GPRO) stock is currently trading at $10.3, which is already 8% higher than the midpoint of Erickson’s fair value range of $9-$10. Also, GoPro stock is very volatile and susceptible to wild swings. It could easily pare all its gains on any negative news as seen in the past few months. GoPro is scheduled to report its Q4 earnings on 2nd February, and investors would do well to wait till the earnings before entering the stock.
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Additional Links:
(2) https://www.bloomberg.com/gadfly/articles/2017-01-13/the-drone-industry-crashes-to-earth?ref=il
