While GoPro Inc.'s (NASDAQ:GPRO) preannouncement was likely aimed at quelling the shorts, questions remain around new product innovation amid such drastic cost cuts. Management reiterating double-digit growth in 2017 makes it hard to argue for further near-term downside, but Pacific Crest needs better visibility into demand before changing its more neutral stance on the shares with the stock already trading below 1x EV/ sales.
While the revenue preannouncement at the high end of the $190 million to $210 million guided range is positive, given Q1 is the lowest quarter of the year, the firm didn’t find the magnitude of the Q1 upside as heroic given management pointed to Karma as the primary driver. Incremental job cuts preserve significantly more cash vs. the firm’s previous forecast, which is the biggest positive; however, in general, investors may not ascribe full credit to a move like this given the obvious headwinds it tends to signal regarding new product development and overall innovation for the future.
In line with management’s commentary regarding cost cuts, Pacific Crest is reducing its 2017 expense load by a bit more than $100 million, which raises its EPS estimate to ($0.02) from ($0.61) and its 2018 EPS estimate to ($0.05) from ($0.59). While there are some working capital quarterly fluctuations, the firm now assumes slightly positive FCF in 2017 and 2018 for the year.
The recent move down surprised the firm a bit given that most of the incremental negativity seemed to be coming from backward-facing arguments. Still, Ambarella’s recent commentary suggested to Pacific Crest that price had been potentially a bigger driver of new product components versus performance for GoPro. With the stock already trading below 1x EV/sales, the firm needs better visibility of annual demand taking another leg down before arguing for something closer to its $6 bear case; as such it remains Sector Weight on the name.
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