Analyst To GoPro Investors: Beware Killer Smartphones

The tale of digital cameras getting killed by smartphones might give pause to long-term investors in GoPro Inc GPRO, an analyst said Monday.

The rise of the smartphone effectively snuffed out the market for digital cameras, according to Oppenheimer's Andrew Uerkwitz, who noted that camera sales peaked five years ago and have since been in steep decline.

Citing GoPro's current growth potential in Europe and Asia, Uerkwitz upgraded GoPro to Market Perform, from Underperform, but said his long-term negative view on the company's prospects is "stronger than ever."

See Also: Oppenheimer's GoPro Upgrade: More Than Meets The Eye

The killer smartphone thesis regarding GoPro has been around for at least a year.

"As accessory makers perfect wearable mounts for smartphones—and they inevitably will—it becomes hard to justify GoPro's competitive advantage," Barron's Alexander Eule wrote last July.

"Consumers prefer smartphones to standalone cameras," according to Uerkwitz, who sees GoPro soon reverting to niche-product status, appealing solely to action sports enthusiasts.

Given GoPro's 58 percent unit growth for the first quarter of 2015, Uerkwitz said "the risk is very high" that investors are too optimistic about the company's outlook.

Lagging In Areas

Moreover, Uerkwitz said GoPro's product is "seriously lagging in terms of software, services, and technological capabilities."

The analyst dismissed the company's media strategy, in which user-generated content is supposed to someday provide advertising revenue, as "a savvy marketing strategy in disguise."

Beginning in 2011, the most popular camera used on the image-sharing website Flickr has been the iPhone, according to Uerkwitz.

Uerkwitz likened GoPro's likely product trajectory to that of the niche market for digital single-lens reflex cameras.

DSLR unit sales peaked in 2012 but have since continued to gain share of the rapidly shrinking market for standalone cameras.

"The action camera market is likely to behave in the same way," Uerkwitz said.

An initial "trickling down" to general consumers from professional and amateur enthusiasts will keep unit and market share growing for a few years.

"There is a growth spurt in the near term as the company finds first-time buyers," according to Uerkwitz.

"But eventually, growth will cave under pressure from more convenient devices such as the smartphone," Uerwitz said.