Alphabet and Facebook are two high-growth tech companies that seem to be using share buyback programs effectively. On the other side of the coin is GoPro (NASDAQ:GPRO), whose notorious share repurchase program netted a significant loss.
In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and contributor Daniel Sparks explain why the buybacks were so poorly timed for GoPro and how the company saved a bad situation from getting even worse.
A full transcript follows the video.
This podcast was recorded on Dec. 2, 2016.
Dylan Lewis: Both businesses that are in -- what I would say -- very stable and strong growth financial positions. They have a ton of cash on the books, and these buybacks made up a very small portion of what was available as cash, so very little business risk there.
On the flip side, and to talk about another tech buyback program that really didn't go very well, we can look at GoPro. This is a business that announced a repurchase program, and when they did, shares were down over 60% from where they were a year prior. So, it seemed like the timing could be opportunistic. The problem was, it didn't really seem to be, right?
Daniel Sparks: Right. At the time, GoPro was facing headwinds already. Clearly, you could see that from the stock price. And it could be said, "The stock price is down, now the company should be buying." At the time, even onlookers might have looked at that and agreed with management. But the reality is, headwinds continued to come, the company continued to struggle, revenue ended up plummeting in 2016, the stock continued to fall. And this repurchase program ended up being a very bad decision. To its credit, GoPro did end up stop repurchasing shares. The repurchase program was $300 million, they only executed about $35 million of that, and they only did that in Q4 of 2015, then they didn't buy a single share back in 2016. That did help.
But yeah, you look at the stock, and they paid around $23 on average per share when they spent that $35 million. Shares today are trading below $10. This was definitely a very poorly timed repurchase program. And not just poorly timed for the stock price, but now you look at GoPro's cash position, they had $280 million when they started this program. Because of headwinds they've faced, they only have $132 million in cash and equivalents today. $35 million is a big deal. At the time, it didn't seem like it. But now, spending $35 million on a $23 stock price that's now trading at $9 seems like a big mistake.
Lewis: Yeah, it doesn't seem like a great use of capital, and a good way to allocate capital. Like you said, thankfully, they decided to suspend the program, or at least pause it. That's that difference we talk about between authorization and execution. Just because of business has a $300 million share buyback authorization does not necessarily mean that they will use all of it. It is simply what the board has decided they are able to do.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Sparks owns shares of Facebook. Dylan Lewis owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.