GoPro (GPRO, Financial), the maker of Point-Of-View action camcorders, had its stock fall 24% after hours to $11.02 per share.
The company announced that it expects revenue of $435 million during the fourth quarter compared with analyst forecasts of $508 million. Analysts had already cut fourth-quarter revenue forecasts from $688 million.
The company also announced that it would cut 7% of its workforce.
GoPro is a good example of why investors should be wary of management teams that overhype their companies. To be fair, GoPro did experience dramatic growth and has tremendous mindshare with its target audience. According to market research firm IDC, GoPro enjoyed a 72.5% market share in the Point-Of-View camcorder market in the U.S., and its global market share was 56.7% in Q3 2014.
Per a Benzinga article, Piper Jaffray's analyst noted that company executives believed the market for GoPro cameras was at least as large as digital cameras and camcorders – or a range of 80 million to 90 million units. With GoPro estimated to ship approximately 6 million units this year, it’s clear that management was painting a very optimistic picture.
Management wasn’t content to just market GoPro as a hardware company. The CEO stated, “We have aspirations of going from success as a consumer-products company to success as a software company and ultimately to success as a media company.”
The following two slides show the narrative that management sells to the investment community. The company claims that it will participate in megatrends like social media and virtual reality.
The slide below depicts a “virtuous cycle” in which customers buy GoPro’s hardware, create content and share it on established platforms, which leads to more people buying hardware.
Management hypes the company’s entertainment portal as a means for future growth. How has this affected revenues? On the earnings call last October, an analyst asked, “Entertainment revenues, will they be material in 2016?”
Management sidestepped the question and said, “We're not giving guidance in terms of whether it would have been material or not.”
The company does not break out entertainment revenue on its financial statements. Furthermore, the last 10-Q stated, “We do not have significant experience deriving revenue from the distribution of GoPro content, and we cannot be assured that these ongoing investments ... will result in increased revenue or profitability.”
Looking at the numbers
The company uses adjusted EBITDA to report its results on conference calls and investor presentations. The reconciliation between GAAP net income and adjusted EBITDA for Q3 2015 is shown in the table below.
From Q3 2015 Investor Presentation
Theoretically, firms use adjusted EBITDA to give a more accurate picture of the results of ongoing operations. Items such as one-time charges are removed from net income. A logical adjustment would be if a beverage company sold real estate for a one-time profit and removed that profit to compare with previous periods. When we look at GoPro’s reconciliation, we see that it’s removing items such as stock-based compensation and POP display amortization. Stock compensation is almost as large as net income. POP stands for “point of purchase,” and it refers to the promotional video displays at retail locations.
First, I didn’t realize that the displays cost that much money. Second, I don’t see from an investor perspective why stock compensation, depreciation or amortization from those displays should be excluded when assessing GoPro’s financial results. From a management perspective, it allows executives to say adjusted EBITDA grew 56% year over year which sounds a lot better than GAAP net income grew 29% over last year.
GoPro has now fallen over 80% from its all-time high. It currently has a TTM PE of 11. For those investors considering this stock, they should ask if this management team is worth listening to.
