A Profitable GoPro Drone Is Not A Sure Bet
By Jay Smith
GoPro (NASDAQ:GPRO), the maker of high-definition camcorders, announcedthat it will begin selling a drone product in 2016. A drone is a logical next step, as many of the company’s customers buy drones from third-parties to take aerial videos with their GoPro cameras. By introducing a drone product, GoPro would elbow out those third-parties and capture part of a fast-growing market. Many analysts applauded the move, with Piper Jaffray saying that the company’s future drone business “mitigates the bear case” by increasing its TAM, and Stifel estimating that the drone product could increase GoPro’s earnings by $0.20-0.30 per share in 2016.
While a drone could certainly accelerate earnings and growth in the short run, GoPro faces long odds in the long run. By introducing its drone product, the company will be competing against DJI, the dominant company in the drone sector with over 70% market share. DJI is growing very quickly, with experts expecting the company to realize revenues of $1 billion in 2015, up from just $130 million in 2013. It is also very well financed, with a private market capitalization of $8 billion, and backing from prestigious venture capital firms such as Accel Partners – the same venture firm that invested in Facebook (NASDAQ:FB). Because DJI is well-financed and has the dominant position in the market, GoPro will have a harder time capturing market share and realizing profits than it would if the market were more fragmented.
In the long run, GoPro will be competing against commoditization of the drone space, where prices fall as more firms enter at lower price points. Many see a parallel between the drone sector and the personal computer sector in the early 1980s. When PCs were first introduced in the ’80s, firms such as Apple (NASDAQ:AAPL) initially made excess profits and realized great growth for the first half of the decade. After other firms caught up with Apple PC features, the company’s margins and market shares shrank until Apple had a steady-state market share of 5-10%. The winner in the PC market ended up being Microsoft, which, with its Windows operating system, created a platform for software developers to offer their products to the public.
Because it is the leader, DJI has a higher chance of creating the leading platform for consumer drones than GoPro does. DJI is also already offering its API to other developers so that they can customize drones for other verticals besides aerial photography. If DJI succeeds in gaining enough developers, it could have an insurmountable lead, leaving GoPro with a niche market share. If this occurs, GoPro’s drone profits will be minimal in the long run.
Given its short float of 21%, many hedge funds are avoiding GoPro, which currently trades at an expensive 28 times forward earnings. Apple, by comparison, trades at 13.5 times forward earnings, even though it has a more sustainable market position than GoPro does. Many hedge funds anticipate that GoPro cameras will undergo the same commoditization that PC makers underwent in the ’80s and ’90s, leaving the company with shrinking margins and slower growth.
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GoPro stock is supported by optimistic sentiment and healthy growth numbers in the short run, but will have a harder time rising in the long run as the company faces more competition and as its products undergo commoditization. With good execution, GoPro can still grow and reward its shareholders, but it is not a sure bet.
http://seekingalpha.com/article/3225076-a-profitable-gopro-drone-is-not-a-sure-bet
