In an all-too familiar pattern for shareholders, active lifestyle camera manufacturer GoPro (NASDAQ:GPRO) started the new year by announcing disappointing holiday sales and a raft of operational changes.
On this edition of Industry Focus, we discuss the proposed turnaround measures and weigh in on whether the company has a viable path forward after years of missteps following its 2014 IPO.
A full transcript follows the video.
This video was recorded on Jan. 9, 2018.
Vincent Shen: Next up, we're going to turn our attention to GoPro. This is probably on the opposite end of the spectrum, as the company is really struggling. Recall that the GoPro IPO was at $24 per share back in December of 2014, giving the company a market cap of about $3 billion. About three and a half years later, the company has run into the same problems that plague a lot of hardware-focused consumer technology companies. Its first-mover advantage has pretty much evaporated with GoPro making action cameras in that category as popular as it is now. And while the company's brand and reputation in action cameras is still unmatched, GoPro tends to adopt a premium pricing strategy, and that has left them very vulnerable to lower price competing devices that have worked to pretty much commoditize the market, and also undercut GoPro's own sales.
They push for a platform-media play, but that never gained enough traction. Ultimately, we now have a stock that's trading at 75% below its IPO price. And there's other recent news that really dampened any enthusiasm for a turnaround for this company, at least in 2018. Asit, can you give us a rundown on some of these latest developments?
Asit Sharma: Yesterday, the company pre-announced its quarter four 2017 numbers. It's expecting $340 million in revenue during that important holiday season. Just for comparison's sake, in Q4 of 2016, the company sold about $541 million worth of product. Go back to Q4 2015, $437 million worth of product. And Q4 of 2014, the year it went public, it sold $634 million. So one, you see a declining trend, and two -- and we'll talk about this in a second -- GoPro often botches its holiday quarter. Other stuff they announced yesterday which did not please investors: It's reducing its global workforce from about 1,250 people to under 1,000 employees. And CEO and founder Nicholas Woodman is going to take $1 in cash compensation in 2018 as part of this restructuring program.
The thing that really stuck out to me of all the bits and pieces they announced yesterday, that they're going to exit the aerial drone business. Listeners may be familiar with their Karma drone. That's an over $1,000 price point product. The company is citing regulatory pressure in the U.S. and Europe, which makes competing in that arena very difficult. I'm sort of skeptical about that. I think, actually, the cash burn that the company has been experiencing might have something to do with this strategic exit from that business. But that's the bulk of the damage they announced yesterday. It doesn't look good if you think about the fact that the stock has decreased by about 80% since its IPO in 2014. What are your thoughts on yesterday's announcement, Vince?
Shen: I think you hit the biggest items there, Asit, for sure. Something else that jumped out to me, for example, there were price cuts that GoPro needed to implement to improve sell through for some of their HERO cameras. And they mentioned that after price changes that they implemented, I believe on Dec. 10th, going into the holiday season, helped double or triple sell through for some of their devices. But that also brought their gross margin down to about 25%, down from the 40% or higher levels the company used to enjoy, so definitely a squeeze in the profitability there.
Otherwise, the big news is definitely around the Karma and their exit from the drone business -- the fact that Karma was supposed to be GoPro's next big thing, a way for them to expand into the drone market, pick up some new growth, and that product had an absolutely disastrous launch, with new users reporting that their Karma drones were falling out of the sky.
I was just talking to one of our other Fool.com contributors, Steve Symington, about this before coming into the studio, the fact that the devices worked, fundamentally they were okau, but a flaw in the battery compartment allowed batteries to get disconnected, and the drones were losing power and falling out of the sky. And that's terrible press that absolutely killed any momentum the company had entering with this new product. Otherwise, reviews, generally middle of the road, maybe slightly positive, for the Karma. But again, it's at a higher-end price point. And the company is giving up here in a pretty costly, embarrassing two-year experiment.
Some other news has come through early this week. There were reports that GoPro has hired investment bankers to pursue a potential sale, and founder and CEO Nick Woodman told CNBC, "If there are opportunities for us to unite with a bigger parent company to scale GoPro even bigger, that is something we would look at." In the preliminary fourth quarter results, Woodman says the company could return to profitability and growth in the second half of 2018, but given that management whiffed so badly on its previous guidance, by over 25%, over $130 million for that fourth quarter holiday guidance, it's tough to take that optimistic view seriously, even with some of the lower expenses that they'll be able to enjoy thanks to the layoffs and some of their other initiatives. But final take on the company, or the stock, Asit?
Sharma: I'd just exercise caution. I think the company has a history of these operational missteps, and they have a history of botching fourth quarters, the holiday seasons. This is not the first time that GoPro has realized in the first or second week of December that they priced the product incorrectly to meet consumer demand. I always feel like the money they put in marketing dollars in December to try to entice people to buy these higher price points, $400 vs. $300, they should use that to absorb some price investment. The stock can grow profitably again -- those are the key words out of the CEO. But that's going to be slow growth and not a lot of profit. So be extremely cautious around these. Going to institutional investors is sort of the white flag of surrender being raised. It's not a value play, by any means. But monitor it this year. You never know what happens. Maybe by the second or third quarter, there might be some value in it for those adventurous investors out there.
Shen: Yeah. The big thing for me is, a lot of the headwinds, the obstacles that it's run into recently, all have very long-term implications. No more Karma, that kills one avenue in terms of the drone market for new growth. The price cuts on the HERO cameras, that points to potentially permanently reduced profitability going forward. And more and more competing products in their core space now. So despite the strength of the brand that GoPro has, I just don't know if that alone is going to be enough to overcome some of these challenges.