Over the past year, I accumulated shares of GoPro (GPRO 5.92%) during its 80% decline, believing that robust sales of its action cameras would eventually allay concerns about cannibalization, competition, and market commoditization. During that time, I defended GoPro against bearish analysts and highlighted its growth opportunities in virtual reality and drones.
Source: GoPro.
However, several things happened over the past few months which forced me to rethink my investing thesis, sell my shares at a loss, and sprinkle their ashes across more promising stocks. Here are three main reasons for doing so.
1. Terrible management decisions
Last July, GoPro launched the Hero 4 Session, an ice-cube sized camera which initially cost $400. When it sold poorly during the third quarter, GoPro reduced its price to $300 and took a $19 million writedown. When demand still didn't pick up in the fourth quarter, GoPro cut its price to $200 and took another $21 million writedown.
Instead of launching new Hero 5 flagship devices for the holiday season, GoPro launched another $200 device, the Hero+, last September. The Hero+ was intended to fit a tier between the $130 entry-level Hero and the $300 Hero+ LCD, but it ended up competing against (and likely cannibalizing) the $200 Hero 4 Session during the holiday season. Those reckless decisions make me question CEO Nick Woodman's understanding of the market, and CFO Jack Lazar's ability to properly price GoPro's new products.
GoPro's cursed Hero 4 Session. Source: GoPro.
Lazar also completely overestimated sales growth twice in a row. During the third quarter, Lazar expected revenue to rise 56% annually, but it only rose 43%. For the fourth quarter, Lazar forecast a 17% decline in revenue, but the company recently warned that sales would actually fall 31%. In addition to bad estimates, Lazar also made some short-sighted decisions. Back in Nov. 2014, he orchestrated a secondary offering which let insiders sell their shares for $75. Last October, Lazar engineered a $300 million buyback to offset dilution and prop up the stock, instead of allocating those funds toward R&D, marketing, or investments.
2. Copying instead of innovating
Meanwhile, Woodman repeatedly teased the media with stories of media expansion, cloud ecosystem growth, drones, 360-degree cameras, and virtual reality rigs. But so far, we've only seen two pricey VR mounts for GoPro cameras. All of Woodman's other promises remain unfulfilled, and he showed up at CES 2016 empty handed. Instead of innovating, Woodman now simply copies what his competitors are doing.
Three years ago, DJI Innovations launched its first Phantom drones with GoPro camera mounts. Yet GoPro only focused on the drone market after DJI started installing its own wide-angle cameras into its drones. Polaroid also recently sued GoPro for allegedly copying the design of its Cube camera to make the Hero 4 Session.
In late 2014, JK Imaging launched its 360-degree action cameras, the Kodak PixPro 360. Last September, it unveiled a 4K version of the camera. At CES, Woodman finally declared that GoPro would launch a similar 360-degree device in the near future. However, such a camera could cannibalize sales of its VR rigs, which GoPro also copied from third-party manufacturers like 360Heros.
Kodak's PixPro 360 (L) and Polaroid's Cube HD (R). Source: Company websites.
3. Market commoditization
The failure of the Session indicates that GoPro's brand appeal isn't as strong as the company believes. This means that it will become harder for GoPro to sell action cameras or its upcoming Karma drone at premium prices.
Meanwhile, current GoPro owners will have very little reason to upgrade unless the Hero 5 (which is now rumored to be delayed until October) offers "must-have" features. But by the time it arrives, the market could be oversaturated with all sorts of innovative action cameras which didn't exist when the Hero 4 Black and Silver were launched in late 2014.
Many mainstream consumers also don't see the point of buying an action camera when they already have smartphones. Last year, Apple (AAPL 0.64%) started showcasing GoPro-like videos with its "Shot on iPhone 6" gallery, indicating that iPhones tucked in rugged cases and mounts could produce videos similar to those made by a pricey GoPro camera. Apple also filed a patent for an action camera last year, but hasn't unveiled an "Apple Cam" yet. If Apple launches one to diversify away from the iPhone, GoPro could quickly lose its appeal among iOS users.
Too many headwinds
In my opinion, GoPro faces too many headwinds in the near future. Its brand appeal is waning, its media expansion efforts have gone nowhere, its software solutions remain clumsy, and its core market is saturated. Looking ahead, the company's "new" products like drones and 360-degree cameras could just be delayed copies of existing products.
For me, these problems indicate that GoPro could soon become the next Flip, Leapfrog, or Skullcandy. The only thing that will convince me to buy GoPro again is a change in management and an aggressive turnaround plan, but neither will likely occur in the near future.
