After an incredible run, shares of GoPro (NASDAQ:GPRO) now find themselves in bear territory from its all-time highs of nearly $100 per share. After briefly dropping due to a horribly communicated transfer of stock to founder Nick Woodman's charity, the investment briefly rebounded before falling victim to a recently sagging stock market. However, recent revelations are providing GoPro with its first true test and investors should watch intently.
Shares of the company are continuing to tumble after a French journalist speculated that Grand Prix-er Michael Schumacher's brain injury may have been caused and/or exacerbated by the GoPro camera mounted on his helmet during a skiing accident. And while it is important to note this is merely speculation, investors in this richly valuated stock have been ringing the register in a "shoot first, aim later" trade. The question for long-term investors is should you follow and sell GoPro stock?
Will this lead to legal costs?
The first issue is will this lead to increased legal costs for the company. Although the company is profitable by netting over $60 million on nearly $1 billion in sales last fiscal year, the company can't afford long, protracted legal battles. In GoPro's S1 it appears the company has been rather lucky in that regard. Its only mention of a legal matter costing the company is for $200,000 with one of the CEO's family members in the second quarter of fiscal 2013.
So outside of family members, the company has been rather lawsuit free. In the S1, the standard, boilerplate legalese applies:
From time to time, the Company is involved in legal proceedings in the ordinary course of business. The Company believes that the outcome of any existing litigation, either individually or in the aggregate, will not have a material impact on the results of operations, financial condition or cash flows of the Company.
But more importantly, will this harm the GoPro brand?
But lawsuits are not the biggest risk to GoPro right now. The company has grown its top line in part because it's a cool and hip brand that has users that appear to throw caution to the wind. But let's not kid ourselves enough to assume that user safety isn't an important issue. If the allegations are true that the camera weakened the helmet structure or directly led to Schumacher's injury, the company will have to directly address those concerns -- and this is not the right time for GoPro to face this problem.
After coming to the market with a $3 billion valuation, shares of the company are now valued in the $9 billion range due to a combination of GoPro's media ambitions and (mostly) sales growth expectations for its new Hero4 camera line. GoPro has a lot riding on its seasonally heavy, holiday-laden fourth quarter. If users (or just as important, parents of users) decide to postpone or forgo the purchase, shares could shed those lofty valuation multiples that are insane for a single-product consumer electronics company.
Here at The Motley Fool, we eschew short-term trading and look at buying stock as investing in a business, because it is. With that in mind, investors should pay attention to this development for GoPro for the aforementioned reasons: potential legal costs and loss of its brand cachet due to safety concerns. If any of these become a risk to the investment thesis you established when buying the company, perhaps you want to revisit your reason for owning this richly valued company.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.