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09/05/2016
GoPro – Needs a hero Pt II

We think GoPro will end up being acquired The difference between Fitbit and GoPro is that Fitbit has understood that the hardware is becoming irrelevant whereas GoPro has yet to understand this crucial fact. GoPro produced a reasonable set of results relative to substantially reduced expectations, but went on to delay the launch of its Karma Drone until Q4 16 while it irons the kinks out of the system. Q1 16 revenues/EPS were $184.5m/LOSS $0.63 compared to consensus of $170.0m/LOSS $0.60. Inventory has been wound down to meet the lower demand outlook and Q2 16E revenues should be higher as sell in volume no longer suffers the inventory drag. However, the company is far from being out of the woods and pent up demand for its Karma drone is – in our view - likely to bring fleeting relief at best. Furthermore, we are concerned that the Karma will not be ready for the holiday season as the problems being encountered relate to the drone being able to pilot itself to some degree. This is a problem that the drone industry has been grappling with for some time and even the $1,400 DJI Phantom 4 and the much publicised Lily are a long way from getting this right.

We think GoPro will end up being acquired

The difference between Fitbit and GoPro is that Fitbit has understood that the hardware is becoming irrelevant whereas GoPro has yet to understand this crucial fact. GoPro produced a reasonable set of results relative to substantially reduced expectations, but went on to delay the launch of its Karma Drone until Q4 16 while it irons the kinks out of the system.

Q1 16 revenues/EPS were $184.5m/LOSS $0.63 compared to consensus of $170.0m/LOSS $0.60. Inventory has been wound down to meet the lower demand outlook and Q2 16E revenues should be higher as sell in volume no longer suffers the inventory drag. However, the company is far from being out of the woods and pent up demand for its Karma drone is – in our view -  likely to bring fleeting relief at best. Furthermore, we are concerned that the Karma will not be ready for the holiday season as the problems being encountered relate to the drone being able to pilot itself to some degree. This is a problem that the drone industry has been grappling with for some time and even the $1,400 DJI Phantom 4 and the much publicised Lily are a long way from getting this right.

We think that the Karma is irrelevant as, even if it is as big a hit as the GoPro cameras were in their day, it is likely to be rapidly commoditised unless GoPro does something different.

This is where GoPro is on a trajectory to fail compared to Fitbit which might just have a chance. The company has a large number of users and it needs to focus on ensuring that they spend all of their camera time using its products rather than leaving the device in a drawer because the phone is easier. This means that it has to create an easy and fun to use ecosystem where its users can store analyse, edit, share and discover the photos and videos they have shot with their devices. It needs to have intelligence such that it understands what sort of activities its users are engaged in and make suggestions and help them discover content that others have shared. If it does this, GoPro can maintain its price premium as racing up the hardware specification curve will only increase costs and trigger a never ending race with the aggressive and brutally competitive Asian manufacturers.

GoPro understands software as a method of easily exporting the content off the camera, but that seems to be where its understanding seems to end. Fitbit on the other hand does understand how important the ecosystem is even if it is going to have difficulty in realising that dream. The situation that faces both of these companies is the same as it is for Spotify. We have long held the belief that the music is incidental and what really matters is the data that it generates and how it can utilise the information to enhance the experience for its subscribers. Spotify is by far the best at doing this which is why we do not fear for its long term outlook despite having the largest and best financed technology company in the world as its main competitor. In the same way, hardware will become irrelevant for Fitbit and GoPro meaning that their appeal to users will end up being based on the user experience that they offer to those in their communities. Fitbit understands this. GoPro does not. There is not much time left before the ravages of commoditisation remove it from contention.

We believe that the best option for GoPro is to be acquired by one of the ecosystem companies like Google, Apple, Tencent etc. as these players will know exactly what to do with its assets.

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