Tags: GoPro | Woodman | stock | IPO

David N. Frazier: GoPro's Founder Knows How to Take Care of Himself

Friday, 11 July 2014 09:50 AM EDT

In a long-awaited and highly anticipated initial public offering (IPO), GoPro (GPRO) went public on June 25 with much enthusiasm, as the company's stock surged during its first day of trading to an intra-day high of $33 from its IPO price of $24.

The IPO made the company's founder and CEO, Nicholas Woodman — who owns 52,379,161 of GoPro's class B voting shares — an instant billionaire.

In addition to becoming a billionaire, Woodman likely pocketed several millions of dollars, and possibly several tens of millions of dollars, the moment that GoPro went public. That's because those who owned GoPro's stock prior to its IPO received $200,784,000 (in total) from the 8,900,000 shares of GoPro stock that they sold in the company's IPO.

For someone who majored in visual arts in college, and who decided to travel the world as a surfer after his first business venture failed, Woodman has done very well for himself financially.

The question now becomes will other people who invest in GoPro make a lot of money from the company's stock?

Before addressing that question, let's review GoPro and how the company makes money.

Company Description

GoPro designs wearable cameras and accessories that are frequently used to film extreme sports. The company's competitively priced cameras and camcorders became very popular with sports enthusiasts during the past several years due to their small, lightweight and durable design. Athletes such as Olympic snowboarder Shaun White and world-champion surfer Kelly Slater are among the many sports celebrities who have used GoPro's products. World famous stuntman Felix Baumgartner filmed his highly publicized space freefall on Oct. 14, 2012, with a GoPro camera.

The company's flagship HERO3 camera, which retails for between $200 and $400, depending on the specific image quality and other features that a user desires, comes bundled with a protective waterproof housing, mounting accessories and built-in Wi-Fi capabilities.

The company's GoPro App enables users to control its cameras remotely using a smartphone or tablet computer and to easily copy images and videos that are captured with the company's cameras to mobile devices for storage and sharing.

GoPro also sells various accessories that enhance the functionality and versatility of its cameras and that enable users to self-capture their experiences during a variety of activities and from different viewpoints. Those accessories include helmet, handlebar and tripod mounts, as well as mounts that enable users to attach a GoPro camera to their wrist, chest or head.

In addition, the company offers a powerful video editing tool that enables users to create high-quality videos from images that they capture with a GoPro camera, and to upload those videos to the Internet.

Revenues, Earnings and Financial Condition

GoPro has performed extremely well in the past few years, with the company's net income rising by 88 percent, 31 percent and 114 percent, respectively, for the years ended Dec. 31, 2013, 2012 and 2011, on revenue increases of 87 percent, 125 percent and 263 percent, respectively, for those years.

After raising approximately $196 million from the company's IPO, GoPro is also very strong financially, with its cash alone covering all of the company's financial obligations by a ratio of almost 2-1.

However, GoPro's revenue and earnings declined substantially during the first quarter of this year. Specifically, net income fell by 52 percent for the three months ended March 31, 2014, as compared with the same period a year ago, on a 7.6 percent decline in revenue. On a sequential quarterly basis, net earnings declined by 74.7 percent during the first quarter of this year on a 34.8 percent decline in its revenue.

That comes as no surprise to me, considering that GoPro doesn't have any significant barriers to competition and that its products don't seem to offer anything that's substantially superior to Sony's Action Cam or JVC's Adixxion action camera, which were launched in 2012. Both of those cameras offer many of the same features as GoPro's cameras do, and they sell for approximately the same prices as GoPro's cameras.

Strategy Going Forward

GoPro's management is likely well aware of the increasing competition that it will face from companies such as Sony and JVC, as well as from numerous other camera makers, including Canon, Nikon, Olympus, Panasonic, Samsung and Toshiba. In my opinion, that's the reason that GoPro described itself in the company's pre-IPO investment road show presentations as a media company.

Although GoPro said in its registration statement that it expects to begin to generate revenue from advertisements on a new GoPro Channel that it plans to offer on Microsoft's Xbox Live, as well as from advertisements on its GoPro Channel on YouTube, the company noted that "it does not expect the revenues earned from those channels to be material during 2014."

Questionable Reasons for the Company's IPO

An even greater concern for public investors is whether or not GoPro's management will act in the best interest of all of the company's shareholders, as opposed to the interests of corporate insiders who hold the company's class B voting shares.

Although I am always happy to hear that entrepreneurs who work long hours and take a lot of risks in life are able to make millions, or even billions, of dollars from the products and services that they create, I'm not impressed with the way that GoPro's founder and CEO made his fortune.

For example, my research indicates that Woodman took very little, if any, risk in founding GoPro. Although he apparently had some very good ideas regarding the design and development of GoPro's small and durable wearable cameras, he got the majority of his initial funding ($200,000) for GoPro from his father, Dean Woodman, who was one of the co-founders of the now-defunct investment banking firm Robertson Stephens. Prior to doing so, Nicholas was traveling the world as a surfer.

While there's nothing wrong with someone getting money from their parents to start a successful company, I'm troubled by the way that Woodman used some of the profits that were generated from GoPro's products in the past few years. And, I'm even more troubled by the implications that those actions have for the company going forward.

Specifically, I'm bothered by the fact that Woodman paid himself approximately $1.8 million during 2013 and, according to filings with the Securities and Exchange Commission (SEC), that he withdrew at least $171.9 million from GoPro during the past two years in the form of cash dividends and sales of the company's stock, but that GoPro still has a net accumulated deficit of $8.9 million.

I'm even more disturbed by the fact that the primary reason that GoPro went public, according to the prospectus that it filed with the SEC, was to pay off its $111 million term loan. That's because that decision would not have been necessary if Woodman had not withdrawn more than $171 million from the company in the past two years.

In brief, the actions mentioned above suggest to me that Woodman has little interest in maximizing the wealth of GoPro's public shareholders. The fact that GoPro's public shareholders have almost no voting rights, with the holders of its recently issued class B shares holding 98.4 percent of the voting power of the company's outstanding capital stock, seems to support that opinion.

Stock Valuation and Frazier's Investment Advice

Meanwhile, GoPro's stock appears to be extremely overvalued, with the company's stock closing on July 10 at a price-earnings multiple of approximately 106, and my research indicating that GoPro will be unable to grow its earnings in excess of a 30 percent average annual rate in the next few years.

Because of the factors discussed above, I would encourage investors to avoid putting any of their money into GoPro's stock. In addition, I would encourage stock market speculators to sell GPRO short. That's because my research indicates that there is very good chance that GPRO will fall to around $15 within the next 12 months.

David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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In a long-awaited and highly anticipated initial public offering (IPO), GoPro (GPRO) went public on June 25 with much enthusiasm, as the company's stock surged during its first day of trading to an intra-day high of $33 from its IPO price of $24.
GoPro, Woodman, stock, IPO
Friday, 11 July 2014 09:50 AM
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