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Why Is GoPro Recalling Karma Drones?

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Price movement

GoPro (GPRO) has a market cap of $1.6 billion. It rose 2.1% to close at $10.86 per share on November 8, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were -13.0%, -30.7%, and -39.7%, respectively, on the same day. GPRO is trading 19.8% below its 20-day moving average, 25.4% below its 50-day moving average, and 13.3% below its 200-day moving average.

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Related ETF and peers

The iShares Morningstar Small Value ETF (JKL) invests 0.28% of its holdings in GoPro. The ETF tracks a market-cap-weighted index of US small-cap value stocks. The index stocks from the 90th to the 97th percentile of the market-cap spectrum, using fundamental factors. The YTD price movement of JKL was 11.8% on November 8. The market caps of GoPro’s competitors are as follows:

  • Sony (SNE) — $39.0 billion
  • Canon (CAJ) — $38.1 billion
  • Best Buy (BBY) — $12.1 billion

Latest news on GoPro

In a press release on November 8, 2016, Bloomberg reported that GoPro “said it’s recalling about 2,500 of its new Karma drones bought since Oct. 23 after a small number of the devices lost power during operation.” It added that “GoPro said it’s working with the U.S. Consumer Product Safety Commission and the Federal Aviation Administration on the recall and plans to resume selling Karma drones as soon as it resolves the issues.”

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Performance of GoPro in 3Q16

GoPro reported 3Q16 revenue of $240.6 million, a fall of 39.9% from the revenue of $400.3 million in 3Q15. The company’s gross profit margin narrowed 630 basis points between 3Q15 and 3Q16.

Its net income and EPS (earnings per share) fell to -$104.1 million and -$0.74, respectively, in 3Q16, compared with $18.8 million and $0.13, respectively, in 3Q15. It reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) and adjusted EPS of -$73.6 million and -$0.60, respectively, in 3Q16, compared with $56.7 million and $0.25, respectively, in 3Q15.

GPRO’s cash and cash equivalents and inventory fell 52.9% and 22.8%, respectively, between 4Q15 and 3Q16. Its current ratio fell to 1.4x and its debt-to-equity ratio rose to 0.78x in 3Q16, compared with 2.8x and 0.43x, respectively, in 4Q15.

Projections

GoPro has made the following projections for 4Q16:

  • revenue of $600 million–$650 million
  • gross margin of 39%–41%
  • non-GAAP (generally accepted accounting principle) EPS of $0.25–$0.35
  • tax rate of 12%

It projected revenue of $1.25 billion to $1.3 billion in fiscal 2016. The company has made the following projections for fiscal 2017:

  • revenue growth in the double digits
  • operating expenses of ~$735 million
  • tax rate of ~15%

For an ongoing analysis of this sector, please visit Market Realist’s Consumer Discretionary page.

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