GoPro priced its new HERO4 Session way too high. Image source: GoPro.
There were a lot of things that investors hated about GoPro's (GPRO 0.29%) third-quarter earnings release in October that sent shares lower. The $400 million in revenue missed consensus estimates, and GoPro offered weak guidance for the coming quarter while admitting that it badly mispriced its new HERO4 Session. In recent months, GoPro has slashed the price twice now to half of its original $400 launch price.
Perhaps the worst part about GoPro's release, however, was the misguided $300 million share repurchase program.
Sending mixed messages
First off, there's the symbolic fact that share-repurchase programs are often implemented when companies simply have excess cash, and no compelling growth investments to allocate that cash toward. For most of its short public life, GoPro has had sky-high valuations that price in significant growth expectations for the future, although the plunge has brought its valuation multiples back down to Earth. The share repurchase announcement sent a painful message to investors that maybe the hyper-growth days are over, and fourth-quarter guidance certainly reinforced that view.
At the end of last quarter, GoPro was sitting on $513 million in cash, equivalents, and marketable securities, but management also points to many areas where it is investing for future growth, such as international expansion and software development.
However, what's really so bizarre about GoPro's share-repurchase program is the fact that the company is doing it so shortly after its IPO, which occurred in June 2014. One of the primary reasons why private companies go public in the first place is to raise equity capital from public investors; yet now, GoPro is effectively saying it has too much cash, just 18 months later? Talk about mixed messages.
Always have an exit strategy
One of the other primary reasons for private companies to go public is to give early investors and company insiders a chance to cash out some of their holdings. This is an entirely appropriate and expected part of the IPO process. But at the same time, the absolute last thing that a public investor wants is to be someone else's exit strategy.
Typically, a portion of IPO proceeds go directly to the company after the company issues fresh shares, with the remainder going toward early investors and insiders selling their own existing shares (less some fees along the way). Consider an extreme hypothetical example of 100% of IPO proceeds going to existing shareholders cashing out. That probably wouldn't instill a whole lot of confidence, and it would be pretty hard to shake that feeling of being someone else's way to cash out.
In GoPro's case, it was split about 50/50. Roughly half of the IPO proceeds went to the company, while the other half went to selling stockholders.
|
June 2014 IPO |
Amount |
|---|---|
|
Total IPO proceeds |
$427.2 million |
|
Underwriting discounts and fees |
$25.6 million |
|
Proceeds to GoPro before expenses |
$200.8 million |
|
Proceeds to selling stockholders |
$200.8 million |
Source: GoPro prospectus.
Just months after its IPO, GoPro conducted a secondary offering as a way to mitigate volatility from the lockup expiration. This isn't entirely uncommon, either. The secondary offering in November 2014 was mostly for insiders to cash out, although a little bit went to the company.
|
Nov. 2014 Secondary Offering |
Amount |
|---|---|
|
Total secondary offering proceeds |
$777 million |
|
Underwriting discounts and fees |
$27.2 million |
|
Proceeds to GoPro before expenses |
$93.2 million |
|
Proceeds to selling stockholders |
$656.7 million |
Source: GoPro prospectus.
GoPro raised nearly $300 million combined last year between its IPO and secondary offering, and now GoPro's board has authorized a $300 million share repurchase program. Why would it issue and sell all that stock only to turn around and buy it right back?
To offset or not to offset, that is the question
Generally speaking, some of the most common criticisms about share-repurchase programs is that they are often poorly timed, and that they sometimes merely enrich company insiders. If share repurchases do not offset dilution from stock-based compensation, then there is no earnings accretion, and therefore no tangible benefit to public investors.
At current prices of around $20, the $300 million repurchase authorization is enough to buy back approximately 15 million shares, which bulls may note is more than 10% of the 137.5 million total shares outstanding that GoPro currently has. But during the past five quarters since going public, GoPro has issued 14.4 million new shares (only 1.3 million of these were issued to public investors through the secondary offering).
GPRO Shares Outstanding data by YCharts.
Even if GoPro theoretically went out and repurchased $300 million of stock right now, it would barely be offsetting the past 18 months' worth of dilution. If shares begin to recover as GoPro begins implementing the program, it will less than offset the dilution. During the past five quarters since going public, GoPro has incurred a total of $95.7 million in stock-based compensation expenses.
Don't just take my word for it. In the earnings press release announcing the repurchase program, GoPro says that, in addition to open-market purchases and block trades, the repurchases may also be made "under plans complying with both Rule 10b-18 and Rule 10b5-1." A Rule 10b5-1 plan is a way for insiders to set up pre-arranged trading schedules ahead of time in order to sell shares and avoid insider trading allegations. Quite literally, GoPro is explicitly stating that some of this money will just go to insiders -- who will undoubtedly continue receiving equity grants, anyway.
Who's the boss?
Shortly before GoPro's IPO last year, CEO and founder Nick Woodman was granted 4.5 million restricted stock units, valued at $284.5 million at the end of last year, making him the highest-paid U.S. CEO in 2014 based on the Bloomberg Pay Index. Does it make much sense that an overhyped small-cap stock that's down 70% year to date should have one of highest-paid executives in the country? (Of course, this RSU grant's value has also plunged by 70%, but you get the idea.)
None of this is to say that Woodman is not vested in growing GoPro's business. Bulls often cite his 30% stake in the company -- clearly he is quite interested in GoPro's stock price. I'm not questioning Woodman's engagement as a founder CEO either, and investors certainly shouldn't question his authority considering his control of 74% of all voting power through his super-voting Class B shares.
I just hate GoPro's corporate finance practices as they relates to equity compensation and this inappropriate share-repurchase program, because it implies that the IPO was less of a way for public investors to get in on a strong business, and more of a way to enrich insiders.
Summing it all up
Just consider this timeline: GoPro gives Woodman a massive RSU grant shortly before going public, adding to his already-substantial position. Half of the IPO proceeds go to insiders cashing out, and then GoPro does a secondary offering to allow insiders to cash out again in an orderly fashion. The company raises almost $300 million combined between both offerings.
The business hits a wall in 2015, GoPro makes some strategic mistakes (such as HERO4 Session pricing), and now the company plans to use that $300 million -- that it apparently never needed in the first place -- to offset all of the equity that it's given to insiders during the past 18 months, leaving public investors about breakeven (best case scenario) in terms of dilution, and almost assuredly sitting on unrealized losses since shares now trade below the IPO price.
If GoPro didn't need the IPO money, and is effectively transferring it to insiders via a share repurchase program, why did it go public in the first place? Do you hate this repurchase program yet?
