Another Wall Street darling turned disaster, GoPro (NASDAQ:GPRO) has become the new definition of how not to be a savvy technology investor. The company brings new meaning to the phrase bamboozled according to investors who are currently in the process of filing a class action lawsuit against GoPro for materially mispresenting the business and its guidance. Aside from its legal woes, the company's revenues are in the process of plateauing and the lack of competitive advantage is starting to whittle away at the company's future prospects. Despite announcements of several new products and initiatives designed to alleviate pressure on shares, the future looks awfully bleak for the company even with recent news of high profile hires and endorsement deals that sent shares surging.
Technology Stocks Losing Favor Amongst Investors
2016 is undoubtedly turning out to be the worst year for technology stocks since the 2008-2009 financial crisis. In the first quarter, there was not a single initial public offering for a technology company despite 22 companies filing, the first such instance since after the failure of Lehman Brothers. Troublesome volatility was named the culprit, but many investors are starting to believe the music has stopped. After countless IPO investors were burned over the last two years buying into the hype and sleek marketing of these companies that are not fundamentally sound, scrutiny has only increased. Since its IPO in 2014, GoPro has been a similar cautionary tale, especially now that its growth story is behind it and investors are placing increased emphasis on the fundamentals of the business.
One of the earliest flashing warning signs for investors was clearly ignored, after the company reported the drop in year-over-year revenues before GoPro was listed. This was first noticed in the original SEC registration statement, with production delays related to deliveries of Hero 3 devices attributed to a substantial downshift in revenues and EBTIDA. After reporting $255 million in revenues in the first quarter of 2013, 2014 revenues for the same period slipped by -7.50%, with EBITDA plunging over -30% during the same period. Even though financial results were able to recover as evidenced by the 41.44% year-over-year sales growth over the course of 2014, revenue expansion continues to taper, potentially approaching a plateau after falling to 16.19% year-over-year growth in 2015. Aside from the ability to take a GoPro anywhere, whether attached to a jet airplane or traveling to deep sea depths, the camera market is saturated with a number of competitors that offer more sophisticated or cost effective solutions.
New Products Fail to Gain Traction
GoPro has spent tremendous time promoting its new "Karma" drone product which is meant to integrate the drone and camera. Apparently, no one told management there were already competitors in the space that had accomplished such feats with products that will likely be made available for a fraction of the GoPro price. Aside from persistent delays in launching Karma, the saturation in the drone space is leading to collapsing product margins. Unless the Karma product offers earth shattering new features, the drone product is unlikely to induce a negative karmic moment for shareholder optimism over the near term despite potentially providing a temporary boost for shares. Past launches, notably the GoPro Session, have not gained the same sort of traction of its initial product, with the company forced to take a $19 million writedown in the fourth quarter after reducing prices by 25%.
Recent Optimism to Fade
Although the high profile hiring of former Apple (NASDAQ:AAPL) employee Daniel Coster to vice president of design has given shares a temporary boost, it is not necessarily indicative of the company's ability to innovate. While shares prices climbed 19.01% after the announcement on April 13th, it is still too early to anticipate the benefit of his arrival. Adding to the optimism was the addition of swimmer Miss Franklin to the team back in March. However, unless this translates to sales, it appears to be a poorly timed marketing ploy from the company to distract from its failure to launch another hit product. Additionally, bad publicity arising from investor lawsuits and a patent infringement case could add to shareholders' ongoing nightmare. Although the suits are unlikely to result in any financial benefit to those pursuing damages, the PR nightmares will remain front and center for all to see.
There is no need to sugar coat GoPro's ugly performance after spending the better part of the last year hemorrhaging shareholder value, with the stock tumbling -68.71% over the last 52 weeks. Owing to the fact that the high growth tale of the company is over, the valuation is completely mismatched for a mature company. While the price-to-earnings multiple of 58.78 might be justified for a high growth technology company that expands at double-digit rates, for a company like GoPro a valuation at these levels is utterly mystifying. None of the products or proposed innovations justify such a substantial valuation. If the company has indeed matured and revenues have plateaued with the potential to shrink modestly over 2016, shares could easily plunge even further from current levels.
Looking at the balance sheet, there should be some pause for optimism. For one, the company boasts no debt and had almost $475 million in cash at the end of the fourth quarter that could readily be deployed towards acquisitions or developing a new hit product. However, over the near term, poor earnings results and guidance will likely overshadow the relatively healthy balance sheet fundamentals. Additionally, margin compression thanks to steep competition will likely see gross margin shrink further. Contrarian investors have picked up on this phenomenon, with a short interest of 30.16% of the outstanding float as of March 31st evidence of the pessimistic sentiment spreading throughout the investment community.
Considering all these factors, value investors and income investors should be running in the opposite direction of buying these shares. Even after announcing over $300 million in buybacks slated to commence in the fourth quarter of 2015, shareholders are still not interested in the story of a high growth company turned into a more mature entity. Poor guidance for the first quarter as well as fiscal 2016 will also harm efforts to revive share prices over the medium term. Put in perspective, the consensus estimate of analysts for first-quarter earnings set to be reported later in the month is forecasting a loss of -$0.59 per share. Based on these metrics, prices are more than likely to retest 52-week lows at $9.01 before collapsing even further in the coming months as GoPro struggles to remain relevant.
The wunderkind tale of the camera that could do a little bit more has not been enough to convince all investors that the company remains a high growth tale capable of turning around a year of misfortune. GoPro is increasingly representing a more mature company, with the valuation anticipated to match that revelation. The product lifecycles for technology companies continue to shrink as consumers demand innovation. GoPro will quickly find itself regressing from a mature company to a fallen star unless management is able to jumpstart growth with another hit product. Bearish investors are likely to be rewarded as longer-term holders are forced to deal with repeated disappointments.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.