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GoPro Inc. used to consistently miss revenue expectations, but the company has done a better job of setting more realistic targets lately, and that’s one reason Morgan Stanley is no longer bearish on the stock.
Morgan Stanley’s Erik Woodring upgraded the shares to equal weight from underweight Thursday, arguing that the company’s management team has improved not just its messaging to the investment community, but also its ability to drive successful product launches.
Shares of GoPro
GPRO,
jumped 6.9% in morning trading Thursday toward a three-month high. The action camera and accessories maker’s stock has now run up 20.7% since closing at an eight-month low of $8.56 on Oct. 27.
Following the company’s most recent earnings report, “it’s clear that execution has improved,” Woodring wrote. After missing consensus revenue expectations in 16 of 20 quarters through the second quarter of 2020, the company has topped expectations in four of the five quarters since, he noted.
“Management has set less aggressive guidance targets” and “product launches have kept to schedule,” he wrote, two factors that have helped drive the recent beats on revenue and gross margins. “This means that estimates are actually being revised higher, with [next-12-month] revenue and [earnings per share] moving 18% and 61% higher in the last 12 months (driving 8% stock outperformance versus the S&P 500], respectively, versus -47% and -59% in the prior five years.”
When thinking about the current quarter, Woodring expects that GoPro’s current outlook for $375 million to $385 million in revenue is “conservative” since it “implies GoPro underships versus demand and drains camera channel inventory below year-end target levels,” which would thus drive revenue growth that’s below seasonal patterns for the fourth quarter.
“We think it’s more likely than not GoPro beats this forecast, barring any unforeseen supply-chain issues, setting up for a positive catalyst in early 2022,” he wrote.
While Woodring has a better feeling about GoPro’s positioning than he did previously, he’s not ready to take an outright bullish stance on the stock, writing that the company still faces a series of “challenges.”
“While we understand GoPro is doing more with less in CY21 (i.e. more profitable despite a smaller revenue base), we believe that the path to consistent long-term revenue and Ebitda [earnings before interest, taxes, depreciation, and amortization] growth is still opaque, as lengthening camera replacement cycles and intensifying market competition are driving year-over-year sell-through declines,” he wrote.
GoPro shares have advanced 25% so far this year as the S&P 500
SPX,
has risen 24%.
