Over the last six months, GoPro’s shares have sunk to $1.10, producing a disappointing 19.7% loss - a stark contrast to the S&P 500’s 6% gain. This might have investors contemplating their next move.

Even with the cheaper entry price, we don't have much confidence in GoPro. Here are three reasons why you should be careful with GPRO and a stock we'd rather own.

Why Do We Think GoPro Will Underperform?

Known for sponsoring extreme athletes, GoPro (NASDAQ:GPRO) is a camera company known for its POV videos and editing software.

1. Decline in Cameras Sold Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like GoPro, our preferred volume metric is cameras sold). While both are important, the latter is the most critical to analyze because prices have a ceiling.

GoPro’s cameras sold came in at 881,000 in the latest quarter, and over the last two years, averaged 4.5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests GoPro might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

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 typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Unfortunately, GoPro’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

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 $60.47 million of cash over the last year. With $130.2 million of cash on its balance sheet, the company has around 26 months of runway left (assuming its $93.05 million of debt isn’t due right away).

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 22.6× forward EV-to-EBITDA (or $1.10 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. We’d recommend looking at Chipotle, which surprisingly still has a long runway for growth.

Stocks We Would Buy Instead of GoPro

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