GoPro, Inc: A Disruptive Innovator or Gadget Stock?

By now, you're probably well aware of NASDAQ: GoPro ( GPRO ) . It's up around 50% since its IPO three weeks ago. It's almost a $5 billion company, on average more than 13 million shares change hands per day, and you can trade options on its stock. GoPro is a hot number, but does it deserve to be?

The in's of the businessEssentially, GoPro is a gadget company. It makes wearable cameras, which were originally designed for sports enthusiasts. To be fair, it makes really good cameras, neat harnesses, and video software, which are starting to catch on with non-sporty folks.

According to the research firm NPD Group, GoPro devices equaled 45% of all camcorder sales last year. While that sounds impressive, that only works out to be about a $2 billion market. And last I checked, my smartphone can make a pretty nice video.

So GoPro hasn't exactly come up with a revolutionary product. When NASDAQ: Apple's ( AAPL ) iPod debuted, it changed the way we listened to music. You could tell something was different about the device. It caught on quickly and disrupted an entire industry. As you know, that wouldn't be the only time Apple changed the way we live.

But I don't get that same feeling when I see, or use, a GoPro device. Sure it's fun and the video is terrific, but it doesn't feel essential. It also doesn't feel like it's something Apple couldn't design if it really wanted too. Seriously, what do you think would happen to GoPro's stock if Apple unveiled a HERO type recording device (when it reports earnings) next Tuesday?

So I think the product is easily replaceable. Whether it's Apple, Samsung, Sony, or even Amazon.com, there's little stopping these guys from imposing their will on GoPro. And that's a bad thing when you consider what you have to pay to own the stock. Frankly, if you're going to pay this price, the business best be elite, with a widening moat.

The economics of GoProWith almost $1 billion in sales last year, GoPro has carved out a nice little niche for itself. And it has been growing like a weed. In 2011, sales were only $234.2 million. But this is not an ultra profitable business. Earnings came in at only $60.6 million last year.

So when you're running a niche business and you're dominating a category, you'd like to be able to generate some serious bank. However, a 6% net margin isn't nearly good enough. Again, what would happen to that razor-thin margin if a larger better capitalized player throws its hat into the ring? Common sense says sales growth would decelerate and those margins will get even thinner.

And that's a problem because this stock is very, very expensive. At recent prices, it's going for more than 80-times earnings, which is OK if the business is good enough to deserve that premium. But frankly, this is a camera company that already owns about half of a small $2 billion market. Simply put: Where does it go from here?

From the prospectus, two of GoPro's key metrics are units shipped and adjusted EBITDA. Year over year, these numbers are healthy. However, last quarter units shipped fell 11%. Adjusted EBITDA dropped by around 30% year over year. Young healthy concepts don't generally struggle like this, especially early in their growth cycles.

In this go-go market, even the most bullish investor needs a company to perform to justify that sentiment. If GoPro doesn't dazzle when it reports earnings on July 31, the drop in the stock will be fierce and sudden.

Foolish final wordsI think GoPro is a fun company, with a neat concept. But I wouldn't call its market huge and I wouldn't say it's a disruptive force. Unfortunately, with a nearly $5 billion price tag, the market is making it out to be the best thing since indoor plumbing.

So be careful. Already we're seeing chinks in its armor. This is a low barrier business. GoPro has already been bid up beyond reason, and unless it changes its model, it has a really short runway. Ignore the hype, focus on the business, and I'm sure you'll be able to find something better.

Leaked: Apple's next smart device (warning, it may shock you)Apple recently recruited a secret-development 'dream team' to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!