It was one of the most hyped stocks of 2014 …

GoPro (GPRO) made its debut on the Nasdaq exchange on June 26. The wearable sports camera-maker priced 17.8 million shares of its initial public offering (IPO) at $24 a share.

Within four months, shares of GoPro jumped above $90. The market-cap surged from $3 billion to over $11 billion. Founder Nick Woodman’s net worth topped $4 billion.

Most athletes are familiar with GoPro’s super high-definition cameras. They are often used by surfers, skateboarders and cyclists. Even astronauts use these cameras to take action videos in zero-gravity environments.

I’m actually a huge fan of the company. I bought a GoPro camera a few months ago. The product is amazing.

However, as a stock analyst, GoPro could be headed for much tougher times as cash-rich competitors flood the markets. This will impact margins and could result in a 40%-plus pullback in the stock from current levels.

Let me explain …

I just got back from the Consumer Electronics Show in Las Vegas. That’s one of the largest conferences in the world which featured more than 3,600 exhibitors in over 2.2 million square feet of space this year.

More than 70% of the Fortune 500 companies showed off their new gadgets and technology that will hit the markets sometime in 2015. This year, no fewer than 170,000 people attended!

I visited hundreds of exhibits — including GoPro. There were large crowds of people trying the company’s new flagship product called the Hero-4.

This camera shoots high-resolution videos (known as 4K). It’s ranked No. 1 in its class for recording high-definition action scenes.

GoPro employees were also showing people how to edit videos using their GoPro software. This is a big part of the GoPro brand — editing videos to be published on YouTube and other media outlets.

Like I mentioned earlier … this is a great product. But GoPro may be a victim of its own success.

As I made my way through the massive halls at the CES, I couldn’t help but notice how many companies were about to start selling similar wearable cameras. I counted at least eight companies including technology heavyweights Sony (SNE), HTC, Toshiba (TOSYY) and Garmin (GRMN).

In fact, shares of GoPro fell 12% this past Tuesday after Apple (AAPL) received a patent to manufacture a similar based high-definition wearable camera.

Apple is the largest technology company in the world. They have over $150 billion in cash (including short and long-term marketable securities). To compare, GoPro has a mere $240 million in cash on its balance sheet.

Apple has the power and cash to become a major player in any industry. And right now, they are targeting GoPro’s market. That’s not good news!

Apple is Not GoPro’s Only Threat …

A new camera made by start-up Giroptic looks like it could become a serious competitor. GoPro only allows you to video what’s in front of its cameras. Giroptic released a new egg-shaped camera that allows you to record videos in 360 degrees (using three cameras at once).

Drones will be another headwind for GoPro.

At the CES, I visited at least 10 drone companies. These helicopter-like devices can fly up to two miles in the air. They are also equipped with super high-definition cameras. And they can be programmed to follow a BMX biker on a dirt course (using tracking devices) and take aerial views of all your stunts.

In short, companies like Apple, Sony and many Asian tech players are going all-in on wearable cameras. And they have billions of dollars to spend on this trend.

GoPro is aware of this competition. That’s why it’s trying to diversify from a hardware-only company into the media business. Management says they have over 8 million Facebook users and over 70 million monthly views on its GoPro channel.

However, the company has yet to find a way to monetize this.

Plus, its process for editing videos is not easy. In fact, tech analysts at Morgan Stanley (MS) said it took them eight hours of work to create a two-minute video.

This is important.

Without a media component, GoPro is just a hardware company. And like most hardware in the tech space, prices and margins deteriorate over time (become commoditized).

Unless the company can make money off its media division, margins will fall sharply.

Plus, the Stock Looks Expensive at Current Levels

Turning to valuation, GoPro trades at 145 times its trailing 12-months earnings. The company trades at a super expensive six and a halftimes sales. And that’s after a 40% pullback in the stock off its inflated post-IPO highs.

Hardware companies like Apple and Cisco trade at three times sales. The headphone company, Beats by Dre, was bought by Apple earlier this year for two and a half times sales. Using three times sales as a valuation guide, GoPro is still considerably overvalued at six and a half times sales.

More important, earnings growth is expected to slow dramatically going forward.

After growing earnings by nearly 100% from 2013 to 2014, analysts expect GoPro’s earnings to grow only 26% annually over the next two years. I believe these figures are optimistic given the huge competition the company is about to see starting this year.

The biggest technology companies in the world are investing huge money into the action camera market.

Billions of dollars will be spent integrating these action videos into their existing hardware (high-definition TVs, tablets, mobile phones). I saw this first-hand at the CES last week.

These competitors will eat into GoPro’s market share through 2015 and beyond. That means fewer camera sales and lower margins as dozens of these high-definition wearable cameras hit the market.

My suggestion is to avoid GoPro. The stock is still expensive after its recent decline. You may see one final bump in shares after the company releases earnings (which includes holiday sales) later this month.

However, I see few catalysts over the next six-to-12 months that would drive shares higher.

Unless GoPro finds a way to monetize its media platform (which is a long shot in the short-term), its shares could fall at least another 40% from current levels — or trade in-line with the rest of the hardware industry.

Good Investing,
Frank Curzio

image credits: Gopro.com