Brace yourselves, GoPro (NASDAQ:GPRO) investors: a sell-off is coming.
A mere 16% of the red-hot action-cam company's shares have been traded on public markets since GoPro's IPO this summer, and the stock has risen nearly 150% from the end of its first trading day (and more than 200% above the $24 IPO price). Any sensible company would pounce on an opportunity to sell some shares and fill its war chest, and that's exactly what GoPro plans to do, according to an S-1 filing made public on Monday.
GoPro will offer up to $800 million in stock to the public, which works out to roughly 10.6 million new shares at the company's closing price on Monday afternoon. This will boost total shares available to almost 25% of GoPro's float, not counting the 5.8 million shares CEO Nick Woodman donated to a charitable foundation last month.
Who's cashing in?
GoPro's stock recently dropped by nearly 14% when Woodman donated that stock, as investors panicked over "loopholes" in the lockup period, which restricts insiders from cashing out for six months after an IPO. Yet shares only dropped by 4% on Monday as the market digested news of GoPro's secondary offering.
This should strike most sensible investors as odd, since only $100 million of the proposed $800 million secondary offering will flow into GoPro's coffers. The rest will line the pockets of early investors and company insiders, who together account for nearly 80% of all of GoPro's currently outstanding (but thus far untraded) shares. Woodman's donation is worth only about half as much as GoPro's secondary offering at current share prices.
GoPro does not need another $100 million, although no one can fault the company for striking while the stock is sizzling. The company's cash on hand rose by $65 million last year, and more than a third of the $136 million in new cash GoPro has generated so far in 2014 came from its core operations. The rest came from the IPO, which left millions on the table when shares soared 55% on the first day of trading. At the end of the third quarter, GoPro reported no long-term debt and $238 million in cash and equivalents, enough to pay for at least half a year of operating expenses if the company did not earn a penny in revenue.
But it is in insiders' interest to stagger their sales to avoid the dreaded post-lockup crash, which can strike newly public companies as insiders rush to cash out all at once. The most visible example of such a crash happened a month before GoPro went public, as Twitter (NYSE:TWTR) insiders dumped shares on the open market and sent the social network's stock into an 18% tailspin.
Twitter's shares recovered and are trading at about the same price they held the day before the lockup period expired. By dumping millions of shares now, GoPro insiders hope to avoid the head-spinning volatility that might emerge if they sell those millions, plus millions more, on Dec. 22, which is when the lockup period ends.
Watch the throne
Twitter's post-lockup troubles might be fresh in investors' minds, but the two companies' situations aren't truly comparable. For one thing, most of Twitter's top shareholders, particularly those in the C-suite, publicly pledged to hold on to their shares as the lockup period neared. Twitter execs also own a far smaller slice of Twitter than GoPro execs own of GoPro.
Twitter CEO Dick Costolo owned 1.4% of Twitter after its IPO, and no Twitter executive (which includes members of its board of directors) individually owned more than 10% of the company's shares. Woodman owned nearly 48% of GoPro's outstanding shares after the company's IPO, even though he sold off almost 3.6 million shares in the offering. Woodman still owns 45% of GoPro's shares after donating some to his nonprofit organization, and he and his father Dean Woodman together control over 50% of the company's stock.
A more comparable scenario might be found by looking back a few years at a rather different tech IPO. Social game services provider Zynga (NASDAQ:ZNGA), which had a disappointing first day on the public markets, soon rose more than 50%, peaking at a market cap of more than $10 billion -- roughly where GoPro stands right now. Zynga's executives, like GoPro's, sold only a small number of shares in the IPO -- then-CEO Mark Pincus retained more than a third of the company's votes after the company went public.
Zynga, like GoPro, also prepared a large secondary offering a few months after going public, with the proceeds lining insiders' pockets ahead of the lockup period. Pincus sold off 15% of his stake in the secondary offering, and it's been all downhill ever since for both parties. Zynga's shares are now roughly 80% lower than they were just before the secondary closed, and Pincus was out as CEO a year later.
This time is (probably) different
Will GoPro follow the same path, and will its investors suffer the same fate? There are some similarities to the way analysts have approached both companies in their early days on the market. Analysts highlighted Zynga's massive user base as its shares rose, ignoring the fact that it wasn't making any money from all but a tiny sliver of those users. Analysts today have offered similarly speculative metrics, such social media traffic or YouTube views, to explain why a hardware manufacturer like GoPro should trade at high triple-digit multiples.
However, Zynga's stock didn't eventually crater because of insider sales, but because its fundamentals couldn't justify its price. Zynga's revenue has fallen by 40% from the company's first public filings, and it has yet to produce four consecutive quarters of overall profitability. In contrast, GoPro's top line has surged, and it is reporting a profit without resorting to any earnings gimmickry.
GoPro Investors should keep an eye on how many shares Nick Woodman places in this secondary offering, and should also watch for any other reports of his major sales in the coming months. But Woodman seems committed to GoPro for the long haul, and doesn't seem likely to sell off significant chunks of stock like Pincus did at Zynga's top. Insider flight seems to be one of the least pressing of all the concerns an investor might have about GoPro today.