GoPro Stock (NASDAQ: GPRO) Crushed by Chinese Competition

I want to take the opportunity to discuss GoPro today. A lot of investors out there are getting punished lately, and many of you may be wondering why.

Even if you don’t own any shares, there’s still a valuable lesson to be learned from the company’s recent roller-coaster performance. I’ll explain what I mean in just a moment, but first let’s take a quick look at GoPro’s history on the public market.

Just over seven months ago, GoPro made its market debut on the NASDAQ under ticker symbol “GPRO.” The company priced its initial public offering at $24 per share, but the stock didn’t stay in that range for long at all.

Immediately upon hitting the market, GoPro’s stock surged 30%, and within just four trading sessions, the company’s share price had more than doubled.

By the end of September 2014, just three months after its IPO, GoPro was bringing investors gains of just over 200%.

But in early October, things went awry when company CEO Nicholas Woodman gifted 5.8 million shares to a charity he runs with his wife. The gift was made prior to the post-IPO lockup date and consequently flooded the market with tradable shares earlier than investors had initially expected.

The move by Woodman spooked investors, and reasonably so. Since the gift was made, GoPro’s share price has plummeted over 55%.

Since the end of 2014, the company has faced a wintery mix of underwhelming guidance, analyst downgrades, and now increased competition from overseas knock-offs.

And over the last few trading sessions, sellers have taken total control of the stock. Last Friday, shares closed down a whopping 6% following negative comments from Oppenheimer’s Andrew Uerkwitz on CNBC:

If you listen to [GoPro’s] last earnings call, they talk about using media, using YouTube, using these Roku channels more as a way to drive traffic to their devices and less about monetizing content… Anybody that’s trying to value GoPro on a media strategy doesn’t fully understand the story and should really look at this as a hardware play.

Uerkwitz went on to point out a catalyst that “really puts the kibosh on GoPro’s strategy for Asia and China in particular.”

What China Does Best

Yesterday, Chinese electronics manufacturer Xiaomi launched its own action camera to rival GoPro’s flagship Hero.

Xiaomi’s Yi camera won’t be available outside China (at least for now), but the price tag alone was enough to send GoPro down over 5.2% on Monday.

Xiaomi’s Yi camera retails at a value of just $64, less than half the price of a $130 GoPro Hero. Even more alarming for GoPro, the camera can shoot 1080p at 60 frames per second compared to the Hero’s 30 frames per second.

Further, the Yi can film up to 40 meters underwater and comes with a smartphone app that can remotely control the camera, edit, and share footage, just like the Hero. It also offers double the storage capacity at 64GB, making it the better device on paper in multiple respects.

Here’s a picture of the Yi strapped to a cat, because why not?

Obviously, the launch of the Yi raises questions about how GoPro will fair against such aggressive competition moving forward. After all, Xiaomi is notorious for undermining its competitors with disruptive pricing.

The company looks to earn money on services rather than devices, so it tends to put incredible pressure on hardware OEMs in China.

Fortunately for GoPro, it doesn’t have a particularly large stake in the Chinese market right now. Less than 9% of the company’s revenue comes from Asia and Pacific-area countries, and that number has only been falling.

By far, GoPro’s largest market both in terms of growth and share is the Americas. Until Xiaomi releases the Yi outside of China, GoPro investors have little to worry about (though the Yi will undeniably hinder growth efforts in the region).

Buy the Dip?

For the first time since August of last year, GoPro is now approaching $40 a share. The company, which was once trading at a triple-digit P/E, has had its value cut by more than a half in just a few months’ time.

The natural question at this point, of course, is whether or not to buy the dip.

While most of the market sold yesterday in response to Xiaomi’s launch of the Yi camera, Gus Richard at Northland Capital Markets has reiterated an outperform rating and $70 price target on the stock. Richard’s logic (or his sales pitch, at least) is that Xiaomi’s entry into the market only “validates GoPro’s business model.”

Now, you really have to hand it to Gus for spinning a product with better specs at half the price as “validation” of GoPro’s business model. Sure, it’s true that companies tend to mimic the success of others, but it’s by no means good news that GoPro now has a ruthless competitor in Asia.

Of course, this isn’t to say the recent sell-off of GoPro hasn’t been overdone. If less than 9% of company revenue comes from Asia, then the 10% drop we’ve seen over the last two sessions certainly seems like a knee-jerk reaction to the Yi launch.

It’s also worth mentioning that while price and specs are important, GoPro still has dominant brand recognition. Any new products coming to market will look like knock-offs to consumers, regardless of what’s on paper.

In other words, it’s very unlikely the Yi will lower demand for the Hero enough to justify recent price movement. If you’re looking for a discount on GPRO, now is probably a good time.

Keep in mind, though — GoPro isn’t necessarily the best play to make here if you’re bullish on action cams. One of the first things I noticed about Xiaomi’s Yi camera is that it relies on some of the same internal components found in the GoPro lineup.

As is often the case, it’s the component providers — not OEMs — that offer investors the best returns of consumer electronics. Not only does the small size of these companies offer a better growth opportunity, but penetration into multiple OEMs provides diversification across brands.

If you happen to be one of the many retail investors who got punished on GoPro over the last few months, there are a few mistakes you’ll want to avoid repeating in the future…

First, try not to buy into hyped-up stocks that everyone already knows about. If you heard about it on the morning news, you can bet your bottom dollar everybody else has, too.

Further, you should very rarely be holding onto a company trading at or near 100 times earnings. A surefire way to be let down is to hold unreasonable expectations.

Most importantly, though, if you want to invest in brand, always check to see if there’s a way to invest in the technology behind it first. After all, only a fool would purchase a car without knowing what’s under the hood.

Until next time,

Jason Stutman

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