Source:GoPro.
Outdoor enthusiasts know GoPro well, and soon investors will be able to say the same thing. We got our first glimpse into the maker of popular wearable cameras last night after filing its prospectus ahead of its initial public offering.
As you can imagine, growth is off the charts. GoPro's booming popularity finds top-line growth soaring 125% in 2012 and another 87% last year to hit $985.7 million. Go Pro has also been consistently profitable with earnings climbing 31% in 2012, accelerating to an 88% advance in 2013.
This is the kind of growth that would send drooling investors up to underwriters with wads of cash in their hands, but dig 19 pages into the S-1 filing and you will find this little gem.
Although our revenue and profitability have grown rapidly from 2009 through 2013, you should not consider our recent revenue growth as indicative of our future performance.
Companies detail risk factors in their filings, and a lot of it is boilerplate doomsday scenario stuff that rarely materializes. However, GoPro is explicitly telling investors to set aside the booming numbers of the past. That wouldn't be such a big deal if we didn't already know how 2014 is starting out.
Billion-dollar maybe
It would've taken just a $14.3 million improvement in sales growth during this year's first quarter to push GoPro into the ranks of consumer tech companies with $1 billion in trailing sales. This would've seemed like a slam dunk. Revenue had to grow just 6% above the prior year's $255.1 million performance to get there. Unfortunately, we saw revenue decline to $235.7 million.
Adding insult to injury, operating expenses shot 46% higher, fueled largely by its research and development budget more than doubling. You don't mind seeing a company spending on R&D when sales are peaking. It shows that GoPro is investing in its future. However, seeing quarterly revenue slip 7% and earnings cut in half is not the way a company wants to be barreling toward its IPO. It may suggest that a company is approaching going public as an exit strategy rather than a way to finance its future growth.
Growth was already starting to decelerate given the 54% advance during the holiday quarter, but an actual decline in revenue and 52% plunge in net income is worrisome. The only silver lining here is that the first quarter of 2013 was unusually robust. Revenue nearly tripled for the period, and it was a rare sequential increase from the seasonally potent holiday quarter of 2012. It's still not what investors like to see, especially when GoPro itself is telling investors to expect more realistic growth in the future than they have experienced in the past.
Another red flag in the offering is the competitive nature of the camera market. Overall earnings growth has been solid, but gross margins have actually been deteriorating from 52% in 2011 to 43% in 2012 to just 37% last year. The silver lining there is that gross margins improved to 41% during this year's first quarter, but that was before the deluge of adding 139 hires to support its broadening product portfolio roughed up the bottom line.
Under my Ambarella
Investors that want some skin in the GoPro IPO without the risk of a potential peak in popularity may want to kick the tires of Ambarella (AMBA 0.15%). The stock popped 5% higher earlier this year on the day that GoPro announced its plans to go public. It makes the video compression chips that fuel the slick wearable cameras, and even last night's S-1 reveals how important it is to its success:
We incorporate video compression and image processing semiconductors from one provider, Ambarella, into all of our cameras, and we do not have an alternative supplier for these key components. If Ambarella stopped supplying components on acceptable terms, or at all, or we experienced delays in receipt of components from Ambarella, we would experience a significant disruption in our ability to produce our products, and our business would be materially and adversely affected.
In short, GoPro doesn't have an alternative supplier to Ambarella for a key part that goes into all of its cameras. However, Ambarella's success doesn't rest entirely on GoPro. It also helps propel the popular Dropcam line of high-def Wi-Fi surveillance cameras and other products that would help offset the sting if GoPro is in fact peaking in popularity. By the same token it's also a play on the success of GoPro's upcoming IPO and a winner if GoPro's able to get back on track later this year.
