GoPro stock was a disaster waiting to happen, even before an Apple Inc. (Nasdaq: AAPL) patent for a remote control camera went public yesterday (Tuesday).
That's because despite its cool technology, GoPro Inc. (Nasdaq: GPRO) faced an array of threats.
"GoPro's got big problems ahead of it - just like every camera company before it - and that means the company isn't worth what many think it is," Money Morning Chief Investment Strategist Keith Fitz-Gerald said last summer. "To borrow a [Warren] Buffett term, GPRO doesn't have a defensible 'moat,' is facing mounting competition, and has no real brand loyalty."
One reason Wall Street fell in love with GPRO stock is because it somehow managed to sell itself as a social media company. That explains how it could have a price-to-earnings ratio of 151, even after its recent plunge.
That means GoPro stock is vastly overvalued. The average P/E for the Standard & Poor's 500 is 19.5 right now. Apple's P/E is 17.
GPRO seems to think that its popularity on YouTube - as well as large followings on Facebook Inc. (Nasdaq: FB) and Instagram - makes it a social media company.
"Here's the thing," Fitz-Gerald said back in November. "GPRO doesn't actually own any of the content its users upload, which means there's no way for GPRO to monetize content except by selling advertising. The notion of GPRO as a media company is laughable."
But the bigger problem for GPRO stock is how easily any company could jump into its market. And those most likely to do so are tech titans like Apple, Samsung Electronics (OTCMKTS: SSNLF), or Sony Corp. (NYSE ADR: SNE).
Apparently this risk had not been priced into GoPro stock.
When the report on the Apple patent surfaced on the website Patently Apple, GPRO stock plunged more than 12%.
The Apple patent was initially filed in 2012. It describes a remote-controlled action camera that could be used under water. And it calls out GoPro specifically by naming flaws in one of its products:
"The HD Hero2 camera includes only a single image capture system, which captures images using an optical axis directed outward from the 'front' of the camera," the patent says. "This can cause excessive wind resistance and presents a high profile that is more susceptible to damage and image artifacts from vibrations in some situations."
Should Apple produce a sleek action camera, it will take a big bite out of GoPro's sales.
Now, some have dismissed Tuesday's news as "just another Apple patent." They note that Apple files thousands of patents (2,003 last year alone), and few ever see the light of day.
But I think we could see a "GoPro killer" as early as the fall.
Apple already puts cameras on its iPhones, iPads, and most Macs. So a standalone camera isn't much of a stretch.
In fact, Apple has built cameras before. It produced an early digital camera, the QuickTake 100, back in 1994. And the cylindrical iSight webcam, designed to be mounted atop a Mac desktop monitor, debuted in 2003.
A new action camera would fit well into the Apple ecosystem. For one thing, an iPhone, iPad, or Apple Watch will probably control it. And a best-in-class action camera that only works with Apple's other devices gives consumers one more reason to stay loyal to the Apple brand.
It also stands to reason that more GPRO rivals lurk just around the corner.
"[GoPro] offers a feature - albeit a really cool one. There's no reason whatsoever to believe that its competitors won't catch up... that Apple and others won't come out with products that match or exceed GoPro's capabilities or be easier to use," Fitz-Gerald warned back in October.
For investors, the message is clear: Don't touch GoPro stock. The plunge resulting from the Apple patent is fair warning of the risk.
GoPro stock closed Wednesday at $52.34. While that's up more than 67% from its June IPO, it's down 44% since early October.
Camera or no camera, Apple is looking forward to a blockbuster 2015... Sales of the iPhone 6 show no signs of letting up, and the company has a completely new product category on the horizon in the Apple Watch. Here's why Apple will see record profits in 2015...
Follow me on Twitter @DavidGZeiler.
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