When done well, buyback programs can increase a company's earnings per share, which oftentimes translates into a higher share price. When done badly, however, they can rob a company of capital that could otherwise be invested back into the business.

In this segment from the Industry Focus: Tech podcast, Dylan Lewis and Sean O'Reilly use GoPro (NASDAQ:GPRO) as a cautionary tale of how a company should not launch a buyback program. Listen in to find out why GoPro's recently announced repurchase initiative was a bad idea, and how badly the company has performed since unveiling it.

A full transcript follows the video.

This podcast was recorded on April 15, 2016. 

Dylan Lewis: I'm taking the company that did not do such a great job. I'm going to talk about GoPro. So, based on profiling, like we talked about in the first half of the show --

Sean O'Reilly: Why are you hating on GoPro, Dylan?

Lewis: I mean, I'm an Ambarella shareholder, so I want to see GoPro do well. But, based on what we talked about in the first half of the show, by all indications, GoPro is in that growth phase, and they should be fueling R&D.

O'Reilly: They just went public.

Lewis: Yeah, within the last two years.

O'Reilly: They do not have a dominant market position, they are not minting cash flow.

Lewis: Yeah. They're in a nascent consumer tech market. But, in the fiscal Q3 call last October, they announced, "Our board of directors has recently approved a stock repurchase plan of up to $300 million. Our newly authorized class A share repurchase program runs for 12 months, allowing us to remain opportunistic buyers and return cash to shareholders." So, at the time that they announced this in late October, they had about a $2.5 billion market cap, trailing P/E in the mid-20s.

O'Reilly: Not high.

Lewis: Not crazy. And, I do understand, I think they were at 16% year-over-year growth in 2015 overall. I do understand seeing that P/E, seeing that valuation, and wanting to be a little opportunistic and having the flexibility to do that. But, I do think there were some major red flags that should have been present at the time.

O'Reilly: Especially to management.

Lewis: Yeah. So, during that announcement, this was also the same quarter that they missed guidance for the first time as a publicly traded company.

O'Reilly: Dun-dun-dun. And, very early in their history as a public company.

Lewis: Yes. And Nick Woodman, the CEO, in attributing that misguidance, said, "Looking back, we now believe that we under-funded marketing in the second and third quarters of the year, which affected demand. To address this, we're taking a more aggressive advertising approach in the fourth quarter, which includes a return to television following a one-year hiatus." So --

O'Reilly: Not good. (laughs) 

Lewis: (laughs) Yeah. You're talking about how you should have allocated internally to selling and advertising, and then you're also announcing that you're going to be buying back shares? It just seems like you're mis-prioritizing where money needs to be going. Of course, the following quarter, Q4 2015, they went on to miss guidance again. And ultimately, in that call, they provided an update on what the repurchase program was looking, how much had been executed --

O'Reilly: This is going to be bad.

Lewis: They said, "We've repurchased 1.5 million shares at an average of approximately $23 for a total of $35.6 million through December 31st. We have a remaining share repurchase authorization of $264.4 million." And, if you remember correctly, they IPO-ed for right around $24.

O'Reilly: And, they're about $13 or $14 right now. (laughs) 

Lewis: Yeah. So, they didn't get a huge discount on what they had originally sold those shares for. They also, based on that cost basis, clearly executed that first 10% of the share repurchase authorization immediately after they announced it. And the shares they bought are down 40% since they executed it.

O'Reilly: The dichotomy here between this and -- by saying this, I am not advocating that GoPro start an online bookstore -- but, the dichotomy there between them and Amazon, that literally says, "We're not buying back any shares, we're not going to pay out dividends, we're just going to keep investing in operations until we win." Big black-and-white difference there.

Lewis: And, I do understand, a lot of tech companies issue equity as --

O'Reilly: Compensation, often, yeah.

Lewis: Yeah. And I do understand wanting to have this as a way to mitigate against shares outstanding getting crazy out of hand and diluting existing shareholders. But, this is not a company that is entrenched in this very stable space. Like I said, they're in consumer tech, they're making pushes into virtual reality capture and drone capturing. Both of these markets [have] barely scratched the surface. It just seems odd to me that they're prioritizing something like this, and I mean, the fact that they timed it so poorly shows that management doesn't have a very good finger on the pulse of what's going on in the business.

Dylan Lewis owns shares of Ambarella. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Ambarella, and GoPro. 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.