Over the past six months, GoPro’s stock price fell to $0.88. Shareholders have lost 19.3% of their capital, which is disappointing considering the S&P 500 has climbed by 1.1%. This might have investors contemplating their next move.
Is now the time to buy GoPro, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think GoPro Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in GoPro. Here are three reasons why there are better opportunities than GPRO and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. GoPro struggled to consistently generate demand over the last five years as its sales dropped at a 6.1% annual rate. This was below our standards and is a sign of poor business quality. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, GoPro’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
GoPro burned through $88.3 million of cash over the last year, and its $146.2 million of debt exceeds the $69.63 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the GoPro’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of GoPro until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping consumers, but in the case of GoPro, we’re out. After the recent drawdown, the stock trades at 13.4× forward P/E (or $0.88 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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