GoPro (GPRO 0.71%) founder and CEO Nick Woodman was the highest-paid CEO in America at the end of 2014, according to the Bloomberg Pay Index. Woodman was granted 4.5 million restricted stock units that year, which were valued at $284.5 million. Unfortunately for Woodman and his investors, the stock plunged from the high $60s at the end of 2014 to around $11 today.
Source: GoPro.
Woodman's own net worth plunged from $3.3 billion in September 2014 to just under a billion. On Jan. 13, his company issued a shocking fourth-quarter sales warning and announced plans to lay off 7% of its staff. That bleak outlook triggered a class action lawsuit and caused some investors to question Woodman's ability to lead the company. Let's discuss Woodman's three biggest mistakes to see if they're right.
1. Lack of innovation
When GoPro launched its first 35mm Hero action camera in 2005, it established a new category of action cameras on its own. But GoPro's form factor hasn't changed much over the past decade, and rivals entered the market with more innovative action cameras.
In 2014, C&A Marketing released the Polaroid Cube, which turned heads with its tiny form factor. That same year, JK Imaging launched the Kodak Pixpro SP360, a panoramic 360-degree action camera. Leading drone makers such as DJI Innovations started replacing their GoPro mounts with their own wide-angle cameras. Some consumers started buying rugged cases and mounts for their smartphones instead of stand-alone action cameras.
Woodman didn't counter these challenges in a timely manner. GoPro claims that it will launch a 360-degree camera, flagship camera, and drone in the near future, but it hasn't revealed any technical details regarding these devices yet. It launched VR rigs for multiple GoPro devices, but only after other companies started selling similar devices. These moves indicate that Woodman can't effectively widen GoPro's defensive moat to prevent its core action cameras from being commoditized.
The Polaroid Cube (L) and GoPro's Session (R). Source: Company websites.
2. Overestimating the GoPro brand
GoPro constantly discusses the strength of its brand, particularly across social media channels and YouTube. At the time of its IPO, GoPro claimed that this brand strength would form the foundations of a revenue-generating media business, which still hasn't happened yet.
GoPro also believed that viral YouTube videos would reduce its need for pricier traditional marketing. That strategy wasn't that reliable, and GoPro recently returned to TV ads after a one-year hiatus. During the company's third-quarter conference call, Woodman admitted that the company "underfunded marketing in the second and third quarters of the year." GoPro also thought that its brand appeal could sell the tiny Session for $400. It didn't, and GoPro had to slash its price twice to $200 to find buyers.
Looking ahead, Woodman probably believes that GoPro's brand-name recognition will help it sell drones and new flagship cameras. But based on the company's projected 31% year-over-year drop in fourth-quarter sales, its brand appeal is fading.
3. Short-sighted decision-making
Many of Woodman's decisions have been short-sighted and enriched insiders instead of investors. Back in November 2014, GoPro launched a secondary offering at $75. GoPro sold 1.3 million shares, while existing shareholders dumped 9.1 million. While that move didn't dilute shares too badly, it generated less than $100 million and undermined investor confidence. It was also unnecessary, since GoPro already raised about $200 million from its IPO and finished the prior quarter with $238 million in cash.
Last October, GoPro authorized a $300 million buyback after reporting weak third-quarter earnings. While that seemed as if GoPro would defend its stock price, it was also aimed at offsetting dilution from stock based compensation, which rose 20% annually and claimed 16% of its revenues last quarter. As I mentioned in a previous article, that cash should have been spent on strategic acquisitions, R&D, or marketing.
Woodman also muddied up GoPro's product line with new low-end and mid-range cameras and the oddball Session. That scattergun approach might reach more customers in the short run, but it also dilutes its brand, confuses customers, and cannibalizes sales of higher-end devices.
Should Woodman step aside?
Investors can't force Woodman out, since he controls nearly three-fourths of all votes through his special Class B shares. GoPro's board is also unlikely to pressure Woodman to resign. However, Woodman and GoPro's investors might benefit if the company hires a more experienced CEO to establish an aggressive eleventh-hour turnaround plan.
