Should You Buy Into the GoPro Drone Hype?

Should you buy into the GoPro drone hype?

With shares of GoPro Inc. (GPRO) soaring close to 10% Tuesday to $20.50, some investors have already made the decision. Ahead of the annual Consumer Electronic Show (CES) in Las Vegas, the San Mateo, Calif.-based action camera maker said its new new drone, called Karma, is slated to be released in the first half of 2016, generating positive remarks from JPMorgan Chase & Co (JPM) analysts.

JPMorgan, who has an overweight rating on GPRO, is among the company's staunchest believers. Their $45 12-month price target implies gains of 140% from current levels. Time will tell whether or not yesterday's huge stock move in GPRO shares was deserved, but with GPRO stock now hovering around $18.90, giving back about 8% of Tuesday's gains, that's not a good sign for Karma.

Drone Hysteria

Like the 3D-printing hysteria that quickly rose and then disappeared, drones have become the go-to growth device. Last month Twitter Inc.'s (TWTR) shares also flew higher after the social media giant was granted a drone patent that allows Twitter users to take "drone selfies." And then there's Amazon, Inc. (AMZN), which has discussed the possibilities of drone deliveries for over a year.

All told, at CES where many companies will put their latest innovations on display between January 6 to January 9, investors should expect plenty of drone options to compete with Karma. But not every drone or so-called "drone company," will thrive – even if Karma is able to shoot 360-degree video, as reports suggest.

In the case of GoPro stock, JPMorgan said that the CES event will serve as a positive catalyst for growth. Separately, while reports suggests GoPro has seen strong holiday demand for its bread-and-butter Hero camera business – specifically the Hero 4 Black and Silver models – GoPro is still an electronics company. And despite boasting some 45% share in the action camera market, its margins are not strong enough to generate the sort of profits needed to help these shares recover.

The Bottom Line

Save for Apple Inc. (AAPL), few electronic companies have maintained stable profit margins to help grow cash. In the case of GoPro, with third-quarter operating expenses climbing 44% – suggesting tons of spending to maintain growth – GoPro's stock, even with its massive correction, still presents strong downside risk.

So, absent clearer signs of business diversification to bring in another revenue stream, GPRO shares should be avoided, even if Karma is good.