The GoPro Problem
GoPro announced its Q4-2015 and full-year 2015 results on Feb-3, and the corresponding data was not pretty. GoPro announced revenues of $1.6 Billion and Net Income of $179.3 Million, which represented growth of 16.2% and 40.0%, respectively - a drastic deceleration on both measures. But perhaps the most troubling data was the Q4-2015 results - Like most consumer electronics companies, the 4th quarter should be its strongest due to the holiday season. For its Q4-2015 quarter, GoPro reported revenue of $436.6 Million and a Net Loss of $41.3M, representing contraction of 31.1% and 133.8%, respectively, compared to the Q4-2014 quarter:
So what happened in Q4-2015? Here is what the company said in its press release:
- "...growth slowed in the second half of the year and we recognize the need to develop software solutions that make it easier for our customers to offload, access and edit their GoPro content." [Emphasis added]
- "Fourth quarter revenue includes a $21 million reduction for price protection related charges resulting from the HERO4 Session repricing in December. Full year revenue also reflected charges of approximately $40 million for price protection related charges issued in connection with reductions of the HERO4 Session selling price in September and December." [Emphasis added]
- "Fourth quarter and full year non-GAAP gross margin was impacted by a charge of approximately $57 million to cost of revenue for excess purchase order commitments, excess inventory and obsolete tooling resulting from the Company's decision to discontinue production of the HERO cameras. This charge is greater than the $30 million to $35 million that was previously estimated in our announcement of preliminary fourth quarter results on January 13, 2016 due to our subsequent decision to simplify GoPro's product offering to consist of HERO4 Black, HERO4 Silver, and HERO4 Session." [Emphasis added]
As a result, GoPro's stock closed near its 52-week low at $9.78 on February 4th (the trading day following the announcement of its results). In August-2015, the company's stock traded all the way up to $64.74, representing a loss of 85% in a span of about 6-months.
- Demand has slowed dramatically: The numbers show that demand has slowed dramatically, but the commentary really validates it. When companies use terms like "price protection", "excess purchase order commitments" and "excess inventory", it means that 1) Retailers cannot sell the products they currently have in the channel and their agreements with GoPro allow them to move them at a reduced prices and recover the difference from GoPro, and 2) "Excess Purchase Order Commitments" and "Excess Demand" means that they cannot move current product or product already being manufactured either through direct channels (e.g., GoPro's online store) or its distribution channel (3rd party retailers).
- GoPro's are like iPad but worse: The steep demand fall for GoPro's products reminds me of the slowdown in the growth of AAPL's iPad, but I actually think its worse, as the GoPro is much more of a niche product. The iPad has proven to have a much longer upgrade cycle than previously thought, thus its growth has contracted after shooting out of the gates in 2010. I don't even know if a GoPro has an upgrade cycle. The company's entry-level HERO4 Session is $199.99 (not exactly cheap) and shoots 1080P at 60fps. Its highest-end model, the HERO4 Black is $499.99 and shoots 4K video. So like the iPad, once you have one of these devices, what's going to incite you to upgrade? At least with the iPad, there is a software component (iOS) with annual upgrade features that are only available on the latest models (e.g., TouchID, Split-Screen mode, etc.) GoPro cameras are also like iPads in the sense that people are far more likely to share them, thus reducing the need to buy multiple devices within a household.
- GoPro is a pure hardware company: The Company's remarks about the need to develop a software component to pair with its hardware goes to show it has no ecosystem. My guess is that people are uploading most of their content to popular platforms like YouTube, Vimeo, or even embedding their footage directly into their websites, etc. At this point, I'm not sure that they could even create an integrated product (hardware + differentiated software) that would change its results - meaning, I don't think GoPro having a software component would incite people who weren't thinking of buying a GoPro to go out and buy one, nor do I think they could monetize the software.
- Smartphone cameras are good enough: The latest cameras being introduced on smartphones are good enough for the average consumer - Both the iPhone 6S and iPhone 6S+ shoot 4K video and both have a 12MP shooter. Other offerings from the likes of Samsung and LG have the same capability. So unless you're a hardcore snowboarder, skier, skydiver or surfer, the use-case for a GoPro over a smartphone is marginal at-best. Additionally, products like the iPhone are already tied to a software ecosystem that makes editing and sharing of pictures and video media much more seamless - you can send media (including photos and videos) over iMessage (an SMS platform) up to 100MB in size. You can also share media over the iCloud platform with other iOS users.
GoPro was supposed to be the next-gen Flip cam that actually proved to be a sustainable business - Cisco bought Pure Digital for $590 million in 2009 for its Flip cam product line, only to shut it down two-years later in 2011. What people don't fully grasp is that the Flip cam actually gained pretty good market penetration, becoming the #1 best-selling camcorder on Amazon and obtaining 35% of the total camcorder market.
So why did Cisco shut it down? Some would say that it was because the company wanted to focus on enterprise solutions rather than consumer hardware, but most believe they knew the product was doomed by the rise of smartphones - at the time that the product was shut down, the iPhone 4 was already out. Well, if that's true, fast-forward four-and-a-half years - smartphones are ubiquitous, the cameras have improved dramatically (both for photos and video), and they all have some form of software embedded in them.
GoPro has had the benefit of amazing branding - something that the Flip cam never had, yet it faces the same challenges that Cisco faced with the Flip cam in 2011. I think an acquisition may be the only way out at this point. But who might be interested?
- Google (or Alphabet) - Maybe. Google has shown a desire to build out, or buy hardware platforms (e.g., Nest and Dropcam via Nest acquisition) to supplement all of its software and internet products. Another interesting piece about Google is the fact that they own YouTube. There could be a natural synergy to create an ecosystem between GoPro's hardware and YouTube's content distribution platform.
- AAPL - Highly unlikely. AAPL tends to be an 'integrated buyer', meaning they buy companies that can be integrated to improve their current products (e.g., PA Semi was used to help develop its own smartphone SoCs, and AuthenTec was used to develop TouchID). I believe its Beats acquisition was a one-off exception and even that company is slowly being more integrated into AAPL's current hardware and software.
- MSFT - Maybe. MSFT could be a buyer as they continue their foray into hardware (e.g., Surface lineup, MSFT Band fitness trackers, and long-standing XBox products). But when you compare MSFT and Google, it's seems like a 'no-brainer' that Google would have a much more strategic use for the company.
- AMZN - Not a chance. AMZN seems content in building sub-par hardware that is just 'good enough' that can be sold at break-even prices, or even losses, to help drive its other businesses.
Whoever might be 'kicking the tires' on GoPro needs what the company doesn't have - a software solution and content distribution platform to create an ecosystem out of its hardware..