Analyst Sees A Better Q4 For GoPro, But Action Cameras Still Saturated

Shares of GoPro Inc GPRO gained more than 8 percent Tuesday after Brad Erickson of Pacific Crest became incrementally positive on the company amid a better than expected performance during the Holiday season.

According to Erickson's proprietary checks, sales of GoPro's cameras were better than expected, which could give the stock a near-term boost given the high short interest and negative sentiment.

Specifically, the analyst's checks showed that GoPro exited the fourth quarter with a "healthy" seven to eight days of inventory at Best Buy and also saw periods of "significant growth in sell-through" throughout the quarter. Granted, the analyst acknowledged that one positive quarter doesn't indicate a sustainable trend, but at least the company performed better than the same quarter a year ago when sell-through was 40 to 50 percent below ship-in.

Given Erickson's positive checks relative to expectations, the analyst is raising his unit estimates for the fourth quarter by more than 10 percent to 2.1 million units.

However, the analyst's positive outlook is short-term in nature.

Erickson argued that the action camera market is saturated and GoPro's peak revenue performance moving forward could be $1 billion to $1.5 billion on sales of up to five million cameras and a modest contribution from GoPro's drone line called Karma which will is expected to go on sale again early this year.

As such, applying normal hardware margins and multiples implies a market cap in the range of $1 billion to $1.3 billion, or $9 to $10 per share.

Of particular note, shares of Amabrella Inc AMBA also gained more than 5 percent on Tuesday. The company is a supplier of components for GoPro's cameras and accounts for nearly one quarter of Ambarella's total revenue.