GoPro Studio. Source: GoPro
GoPro(GPRO -0.59%) has had a rocky road so far as a public company. After seeing its share price triple in the initial months after its IPO, the stock has suffered a continued decline to all-time lows. Some of this volatility is to be expected as the company goes though its growing pains. It does operate in the brutally competitive tech hardware space and is being led by CEO Nick Woodman, who 13 years after founding the company is still just 40 years old. I remain bullish on GoPro's prospects as both a company and an investment and look forward to seeing what the next five to 10 years will bring. In the meantime, here are a few questions I have for Woodman and his team.
Painful mistakes: lessons learned, or more to come?
GoPro had a difficult last quarter, and the market punished the company for it. There was a lot to like -- revenues up 43% year-over-year and 230 basis points of gross margin expansion -- but a few miscues led to a top line miss. The company released a new, smaller camera called Hero 4 Session, which fell short of sales expectations.
To their credit, management admitted that they priced the Session to richly and failed to support it sufficiently with advertising. The price has been slashed from $399.99 to $299.99, and Woodman, speaking on the conference call, seemed pleased with the transition, "While it got off to a slow start, Session is now performing as a full-fledged member of the HERO4 lineup."
Hero 4 Session. Source: GoPro
It's impressive when a leader immediately opens up about shortcomings and the actions taken to remedy them. My concern is that this kind of misstep will lead to an overcorrection, in the form of excessive ad spending, or is simply an early sign of things to come. For the time being, I like the candor, but I would also like to hear some more about what caused the shortfall and how future missteps will be avoided.
What is the future for Quadcopter and Virtual Reality?
GoPro is releasing two new hardware products that will further diversify the company's offerings. The consumer quadcopter is expected to launch in the first half of 2016 and looks to be a device with multiple applications for consumer and business use. Woodman, from the conference call, said, "As we draw closer to launch, we'll share more about our Quadcopter's unique value proposition." I would like some more color on this. For now, all we're left with is this beautiful quadcopter footage.
My concern is that this device will be targeted toward personal use, which unnecessarily limits the addressable market. It's an interesting niche device to capture a snowboarder careening down a mountain or a surfer's back as she hits the top of a wave, but the business uses seem nearly limitless. Surveying, security, forest maintenance, and fire prevention, among many other areas seem ripe for disruption. I hope this is the direction GoPro is heading in with its new device.
Virtual reality has the possibility to be the next great shift in how consumers communicate, experience events, and consume media. Facebook purchased Oculus Rift, and many of the other tech titans are working on how they can capitalize on this new trend. GoPro is in a powerful position with its new six-camera rig that will capture VR footage. The proliferation of VR devices is going to demand amazing content. With GoPro and Oculus, consumers will be able to feel like they're walking past ancient ruins, sitting courtside at a Knicks game, or flying through the air with Tony Hawk. Some clarity about the future of this technology would go a long way toward turning this stock around.
Does the buyback policy forestall other investments?
GoPro also announced a $300 million share repurchase authorization. For a young tech company, this would normally seem like a foolish decision. Money should be plowed into research and development to create products that can drive the market cap 10, 20, or 100 times higher, not shave off less than 10% of the outstanding shares. GoPro is in a unique position here, barring one small caveat.
The company is actually profitable, cash flow positive, and has a cash balance around one-seventh of its market cap. Thus, it doesn't appear to be starved for fresh tinder to fuel its growth ambitions. In this case, opportunistic share repurchases at depressed levels could be an excellent use of capital. The one caveat is if management made this decision in lieu of taking a gamble on a home-run product. I'd like to know if GoPro currently has enough capital to invest in any product or service that it can dream of and that the buyback isn't interfering with innovation.
The company's new hires, evolution into a media company, and hardware products will ultimately determine its fate. I'm happy to have a founder CEO like Nick Woodman at the top who is uniquely qualified to lead the business that he built. I remain long and am looking to add to my position soon.
