Can GoPro Inc (GPRO) Stock Bounce Back After the Karma Fiasco?

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GoPro Inc (NASDAQ: GPRO ) stock has been badly hammered following news that the company was recalling the Karma drone. This came in the wake of another heavy post-earnings selloff a few days prior, leading to GPRO stock losing 27% of its value in the space of a month.

Can GoPro Inc (GPRO) Stock Bounce Back After the Karma Fiasco?

Source: GoPro

GoPro stock announced that it had issued a recall of about 2,500 devices that had been sold since Karma was launched on Oct. 23 due to reports about the drones losing power while in use. The company said that it won't offer exchanges but will instead provide a full refund once the owners return their gadgets.

GPRO stock is now down 45% year to date and has lost roughly half its value over the past 12 months.

Is GoPro's Management Floundering?

The Karma recall did not go down well with investors, since it came hot on the heels of another report that pointed to serious execution issues. GoPro has been pushing back shipment dates for the Karma, which doesn't look good considering that the company had earlier pushed the launch date from May to September. This points to possible production or supply issues which in turn could potentially hurt traditionally hot holiday sales.

GoPro issued lower-than-expected guidance for the fourth quarter, saying it expects revenue of $625 million and EPS of 30 cents against Wall Street's expectations of revenue of $666.1 million and EPS of 44 cents.

Whereas this could be the company's way of reining in on investor expectations after another weak quarter, it could be grounded in reality since GoPro has missed earnings estimates in three out of the last four quarters.

The Bullish Stance for GPRO Stock

GoPro has been rather economical with details regarding the Karma delay.

On one hand, investors can hope that the delay is being caused by a temporary shortage of components rather than any major issues along the supply chain. After all, GoPro is not the only drone manufacturer that's facing delays here. DJI , manufacturer of the Phantom drone, has pushed back shipment date for the Mavic Pro from mid-October to a "within November" timeframe.

According to DJI's management, the delay is being caused by " amazingly strong global demand ."

Whereas the "strong demand" theme might not necessarily apply to Karma, there's reason to remain cautiously optimistic.

After all GoPro could merely be trying to limit availability of the drone to avoid a repeat of the Hero 4 Session fiasco. GPRO stock was forced to offer hefty discounts for the camera in a bid to get rid of excessive inventory levels and poor sell-through. If something similar happened to Karma, GoPro's image would be left in shreds.

Reality Check

But that kind of bullishness melts into thin air when you consider the issues currently plaguing GoPro, including the Karma recall. For GPRO stock to have issued a recall of its much-awaited drone and risk damaging its reputation suggests that the defect rate in the product must have been quite high. That's a direct indictment on the company's design team and manufacturer(s).

We cannot overlook GoPro stock's less-than-stellar execution track record. The company has flubbed several high-profile product launches in the past that put a damper on its ability to execute.

For instance, CEO Nick Woodman told investors back in May that he was not aware that Karma would be delayed right up until a week before the first quarter conference call. That clearly suggests that management was blindsided by events.

Further, the company repeatedly delayed the launch of its mainstream stand-alone 360-degree camera by months, thereby giving devices such as Samsung 's (OTCMKTS: SSNLF ) Gear 360 a nice head-start. The same goes for the 16-camera Odyssey rig which the company jointly developed with Alphabet Inc (NASDAQ: GOOG , NASDAQ: GOOGL ), only to start shipping a full year after its introduction.

One Reason to Be Long-Term Bullish

That's the kind of uncertainty that the market hates, which is likely to continue taking a toll on GPRO stock. Right now it's rather difficult to find any positive catalyst for GPRO stock except one - the company's 2017 guidance.

GoPro issued upbeat 2017 guidance, saying it expects double-digit revenue growth and a GAAP net profit. If those predictions turn out to be true, it will mark the first time the company recorded growth and returned to the black in five quarters. GoPro says that its main focus next year will be to cut costs in a bid to maintain profitability. Investors should use the fourth quarter to check how well the company performs on that score.

If GoPro manages to return to growth and profitability in 2017, you can expect GPRO stock to soar to new highs.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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