Famed investor Wilbur Ross of Invesco Capital, who built his fortune on restructuring failed companies with leveraged buyouts, recently dumped his entire stake in GoPro (NASDAQ:GPRO). Ross bought over 43,000 shares in the action camera maker in Q4 of 2015 for an average price of $22.98. He reportedly sold that entire position in Q1 for an average price of $12.44, incurring a loss of nearly half a million dollars on his initial investment.
That loss won't matter much to Ross, who has an estimated net worth of about $2.9 billion. But it raises serious red flags when a well-known contrarian investor takes a 46% loss on a stock at nearly half its IPO price. Should investors follow Ross' lead and sell this beaten-down stock?
Who else is selling GoPro?
Ross isn't the only high-profile investor to dump GoPro. Last November, Taiwanese contract manufacturer Foxconn, GoPro's largest shareholder, disclosed that it had sold 30% of its stake in the company, reducing its initial 9% stake to about 6%. Foxconn had bought that stake for an average price of $17.08 before GoPro went public. Unnamed insiders told to Bloomberg that Foxconn CEO Terry Gou, in Bloomberg's words, eventually "became convinced that he had overpaid for his shares." BidnessEtc.com reported that Foxconn made around $7.43 million in profits on its sale.
Top institutional investors have also been reducing their stake in GoPro. Based on their most recent 13-F filings, 117 institutional investors decreased their positions and sold a combined 15.74 million shares last quarter while 102 institutional investors boosted their positions and bought a combined 8.82 million shares.
Lastly, company insiders are dumping the stock. Over the past six months, GoPro's insiders sold 2.78 million shares but didn't buy a single one. One of the biggest sellers was GoPro President Tony Bates, who was hired two years ago to expand GoPro's YouTube presence into a bigger media business.
Why are these sellers giving up on GoPro?
Investors shouldn't assume that all stock sales indicate a loss in confidence in the company. Some investors and insiders might simply need to cash out for personal reasons. However, the decision to dump GoPro as it plummeted 80% over the past year raises troubling questions about its future.
First, demand for GoPro's action cameras seems to be drying up, and cheaper devices with more features are flooding the niche market. GoPro's annual revenue is expected to fall 17% this year, a big drop from 16% growth in 2015 and 41% growth in 2014. Margins contracted as GoPro sold its inventory of Hero 4 Sessions, which went through two price cuts before buyers started appearing. As a result, GoPro became unprofitable by both non-GAAP and GAAP standards.
Second, GoPro is betting heavily on the Hero 5 and Karma drone to turn things around during the holiday quarter. However, price expectations for action cameras and drones are plunging, and competition is heating up.
Yi Technology recently released an action camera that runs on the same Ambarella (NASDAQ:AMBA) chipset as GoPro's Hero 4 Black, but adds a touch LCD screen and bigger battery for half the price. Xiaomi just launched a 4K drone that costs less than GoPro's Hero 4 Black camera. Apple (NASDAQ:AAPL) is displaying drone maker DJI Innovations' high-end Phantom 4 drones in feature bay displays at over 400 of its brick-and-mortar stores. DJI employees are also offering drone lessons at select locations. GoPro hasn't explained how it will counter any of these challenges.
GoPro also seems to be following market trends like VR and drones instead of introducing innovative new products. The company previously promised to expand its media business, build a cloud platform, and develop better apps for editing. The first two haven't arrived, and the third is still a work in progress.
This might be why Wilbur Ross gave up
Ross bought most of his stake in late 2015, when it seemed like the market was overly bearish on a company that had posted double-digit sales growth for several consecutive quarters. But the Session's flop derailed that growth during the holiday quarter, indicating that GoPro had overestimated its brand appeal.
Management subsequently launched a wasteful $300 million buyback, wrote down millions more in repricing the Session twice, spent over $100 million on two apps that didn't generate any revenue, then broke its promise to launch the Karma in the first half of the year. After all those missteps, it's easy to see why major investors like Wilbur Ross would give up on GoPro -- it's likely become a falling knife instead of a viable turnaround play.