The Short Case For GoPro

| About: GoPro (GPRO)


GPRO reported an amateur quarter.

Full distribution limits Hero Growth.

Precarious financial position of retail customers presents risks.

Cash flow boosted by factored receivables.

EU sales mask higher DSOs.

GoPro (NASDAQ:GPRO) investors might get queasy watching the replay of the company's first quarter report on July 31st. The company went public on June 25th at $24. The stock traded as high as $49.90 before falling roughly 10 points to its current level after a messy quarter last week.

Although revenue of $245M officially beat estimates of $238M by 3%, newly public companies tend to blow out their first public quarter by a much greater magnitude. This is a combination of the cozy relationship that underwriters have with management from traveling together on the recent road show and the desire of underwriters to publish conservative numbers, which should easily be beat. GoPro's Q2 14 had all but ended when the company went public on June 25th, giving underwriters a fair assessment of body language and unspoken confidence in estimates that would soon be published.

GoPro has had the unfortunate experience of going public one quarter too late. The company enjoyed quarterly YoY revenue growth rates between 45% and 191% for all of 2013. However, the first quarter of 2014 showed an ominous 7.6% YoY decline in revenue. The company explains in its prospectus that the problem lay not in Q1 14's revenue being too low, but in Q1 13's revenue being TOO HIGH, the result of a delayed product launch of the Hero3 camera, which launched in Q1 13 instead of Q4 12. By shifting all the launch revenue into Q1 13, the comparison made revenue growth difficult in Q1 14. However looking at revenue for the 6 months ended March 2014 versus the same period in 2013, an exercise which should smooth out any issues from the delay, shows a tepid 22% YoY growth rate, a significant slowdown from previous quarters. Although revenue rebounded to 38% in Q2 14, guidance implies another slowdown ahead.

The lumpiness in GoPro's revenue growth indicates that the company has reached close to full distribution. Triple digit growth from 2011-2012 was likely due to filling the shelves of Target, Wal-Mart, RadioShack and its largest customer, Best Buy. Revenue growth enjoyed due to the initial inventory fill at a store is difficult to repeat as subsequent orders simply restock merchandise that has been sold.

GoPro must weather the additional problem of the deteriorating financial health of its largest customers. Best Buy, GoPro's largest customer, has kept its store base stable over the last 2 years but is down to 1057 stores from a high of 1105 in Q2 12. The company has been suffering negative comp sales for years and is currently undergoing a flailing restructuring. The woes of Radio Shack are well documented. The company plans to close 200 stores this year, a number that would likely be higher if not for the covenants of its lenders. While Target and Wal-Mart's store bases are more stable, both retailers have shown subdued comp growth.

This leaves GoPro to increase revenue via new model introductions, something it's been quite successful at doing in the past. However, new introductions are delivering less bang on the top line. Despite the introduction of the Hero3+ Black in October 2013, which retails for roughly $400 or 33% higher than the price of the Hero3 Silver, GoPro showed only a 3.5% increase YoY in average sales per unit in Q2 14. Instead of delivering news of the next generation Hero on its conference call, management expounded on new accessories for hunters and musicians as a way to expand its user base. This will not be enough to reinvigorate GoPro's revenue growth. In fact, revenue growth estimated for Q3 and Q4 14 is 35%, a small deceleration from the 38% just reported. Investors should be aware that Q4 13 enjoyed a revenue boost from the aforementioned Hero3+ Black launch and may hinder GoPro's ability to meet that hurdle in Q4 of this year.

Investors should also be aware that the low receivable days that GoPro management brags about are partly due to the sale of receivables. While selling receivables is somewhat common, particularly if the chance of collecting the funds is impaired, the company selling the receivables receives a discounted amount versus the amount it would have received otherwise. GoPro factored $71M of receivables in 2013, $17M in Q1 14 and undisclosed amount in Q2 14. When GoPro files its Q2 10Q it will hopefully quantify the amount factored so that investors can calculate an adjusted DSO. Selling receivables also results in a lump sum that boosts cash flow. GoPro has chosen to disclose more details regarding its adjusted EBITDA than cash flow. Hopefully future filings will allow investors to adjust cash flow for these factorings.

On its Q2 conference call management also disclosed that EU customers pay for their product "up front" generating no receivable at all! Obviously the DSO associated with customers generating a receivable would be much higher. GoPro does not break out EU revenue, which would allow investors to calculate a true DSO.

With a stock trading at 49x 2014 estimates and 40x 2015 estimates, investors might choose to spend their time watching GoPro's video of orphaned pelicans learning to fly than to spend their money buying this stock.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in GPRO over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.