During the summer of 2014, GoPro Inc (NASDAQ:GPRO) pulled off a red-hot initial public offering. The company priced its IPO at $24, and GPRO stock spiked by nearly 50% on its first day of trading. That was only the start, as GoPro shares fetched about $87 within a few months.
And that, unfortunately, was the peak.
Since that time, GoPro stock has been a gut-wrenching experience for shareholders. Those unlucky few that have held on the whole way down now sit on shares worth just $8 each.
GoPro has suffered several miscues, including product glitches and recalls. There was a string of disappointing earnings reports and multiple layoffs. Along the way, CEO Nick Woodman remained upbeat (good) but often downplayed the issues (not good). Just consider this remark during an earnings call in February 2015:
“We see a future in which GoPro serves as a platform for people around the world to visually express themselves like never before. A future in which their shared experience and collective content on our platform is as valuable to GoPro as YouTube is to Alphabet or Instagram is to Facebook.”
Investors who looked carefully anticipated the severe problems and got out (or avoided GoPro altogether) before things got hairy. Here are a few things they would’ve seen, and they act as lessons about what to watch when considering other IPOs.
Issue #1: Technical Factors
It’s important to realize that IPOs are geared to generate short-term gains. Part of this is due to the general underpricing of the deal, which helps to stoke interest with institutional investors. But an IPO will also usually have a small float, say 10% or 20% of the outstanding shares.
The bottom line: It does not take much buying power to drive the stock price.
But the technical factors are temporary. For example, after six months, a company will allow insiders to start selling their shares, which often puts pressure on the valuation.
As for the case with GoPro, the company went even further. It put together a secondary offering of its shares — essentially a cash-out for existing holders — for a total of 9.1 million shares. Woodman himself accounted for more than $300 million.
It’s always concerning when a CEO takes such a big payday so soon after the IPO.
Issue #2: Total Addressable Market
A key for any successful IPO is the size of the Total Addressable Market (TAM). A big enough market, and there’s room for plenty of long-term growth.
But GoPro immediately was flooded with concerns about the potential size. How many people really need a camera for sports activities? It’s a niche, and the GoPro S-1 admitted as much by listing it as a risk factor:
“Our initial growth has largely been fueled by the adoption of our products by people looking to self-capture images of themselves participating in exciting physical activities. We believe that our future growth depends not only on continuing to reach this core demographic, but also broaden our customer base to include a more diverse group of consumers seeking to capture themselves, family members and things around them in their daily lives.”
These fears have been borne out.
GoPro has faced major challenges in attracting new customers, and existing customers aren’t jumping to upgrade. In light of this, it should be no surprise that GPRO has experienced a deceleration of growth during the past couple years.
Issue #3: One-Trick Pony
Another notable risk factor for GPRO was its concentration in the camera market. Here’s how the company put it in its S-1:
“To date, substantially all of our revenue has been derived from sales of our capture devices, and we expect to continue to derive the substantial majority of our revenue from sales of cameras and accessories for the foreseeable future. A decline in the price of these products, whether due to macroeconomic conditions, competition or otherwise, or our inability to increase sales of these products, would harm our business and operating results more seriously than it would if we derived significant revenue from a variety of product lines and services.”
Points for accuracy, but I’m sure GoPro isn’t happy that this was a spot-on prediction.
GoPro did make investments to enter new markets, such as drones and virtual reality. But these moves were too little too late. Other operators (such as DJI in the drone market) are dominating those markets, leaving little room for GPRO.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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