Pando

GoPro tanks, and that's not good for other profitable companies

By Kevin Kelleher , written on January 14, 2016

From The Facepalm Desk

When the going gets tough, GoPro goes south.

Which, for now at least, settles a debate that has raged among GoPro bulls and bears ever since the company went public. And which isn't terrific news for the other consumer-tech companies that have joined GoPro in braving the public markets in recent years, let alone the companies that are contemplating an IPO in 2016.

GoPro fell near $11 a share last night. Eighteen months ago, GoPro went public at $24 a share, an IPO that raised $427 million and valued the company at close to $3 billion. Less than half of those proceeds - $201 million – went to GoPro itself. The rest went to cash out insiders like Nick Woodman and RW Camera Holdings, as well as pay back loans to obscure but lender-friendly credit unions like JP Morgan and Citibank.

After the IPO, Woodman made an appearance in the dog-and-pony shows staged on the Nasdaq floor that we all remember from the dot-com years and that - somehow, bizarrely, wrongly - live on. He held a GoPro camera between his teeth. Five months later, he was back at the exchange, not with camera in mouth but with hat in hand, seeking another $777 million in a secondary round.

A secondary round pursued within the first year after an IPO can signify a company that is a) growing so fast it's inhaling capital the way a healthy teen consumes food, or b) greedy. GoPro pushed for its secondary round only five months after its IPO. This was not a good sign for new investors, but they seemed to bite on the bait anyway. And some pundits pounded the table for this secondary offering, so there was that.

After all, within those five months, GoPro's stock had risen from its $24 a share offering price to $98 a share, or more than four times its offering price. Its secondary offering was priced at a relatively modest $75 a share, and investors went for it. But GoPro ended up raising only $93 million for its coffers.

Why such a paltry take? The rest of it went to insiders: Woodman again, as well as the formally repressed RW Camera Holdings - which turns out to be a private-equity firm called Riverwood Capital, which dares not speak its name in stock prospectuses - and in particular a GoPro board member named Michael Marks. He and other insiders cashed out while smaller investors who caught the GoPro fever dream were left with the tab. And Marks has only accelerated his selling in the past year.

Think about that. A promising company went public to great fanfare, with half the money going to insiders. A few months later, it had a much quieter secondary offering that raised three times as much money, with even more of the take going to insiders. And the insiders kept selling as the stock sunk. Does anyone now wonder why the stock fell 25 percent in an evening? The answer is, because insiders don't care.

In theory, the insiders are the ones who are supposed to care most. Woodman likes to say in public he founded GoPro while following his passion, which is really a lovely story, until you remember that financial markets eat life passions for breakfast, before dining on strangled dreams at lunch.

Woodman – who has sold nearly a half a billion dollars in GoPro stock to date (and remember, GoPro's market cap was only $2 billion Wednesday before the stock plunged, and is more likely worth $1.5 billion now) – has learned to surf these treacherous waves with formidable skill, even if it leaves other GoPro investors eating flotsam in his wake.

This is bad news for Fitbit, and Dropbox, and all the other companies that forged portmanteau words everyone else had given up on. These are the ones branded, like GoPro, as one-trick ponies. GoPro will pull them down too. GoPro, like Fitbit, has been profitable for a while. And Fitbit, like GoPro, has to prove to investors it has a second act. Fitbit was down 5 percent Wednesday and is down 36 percent so far this year.

GoPro, of course, issued a lot of talk about pivoting into new markets, which it would need if Apple or others copied its success formula. GoPro's answer was a push to become a media giant. So a year or so ago, you could have subscribed on YouTube to watch GoPro's channel of intoxicating sports for couch potatoes. Or you could have subscribed to PewDiePie. Today PewDiePie has 42 million subscribers and his own network through Disney. GoPro has about one twelfth as many subscribers.

See? This is exactly why you should never appear on the floor of a stock exchange with your product clenched jauntily between your teeth. Come an unsavory shareholder meeting and the retirees who looked to you for fiduciary rectitude are going to want that camera in your mouth again, while they scream spasms full of rage at you in all their hi-def spittle.

It seems I may have buried the lead here. GoPro isn't just down 25 percent in a day, it's down 54 percent from its offering price and 88 percent down from its peak. And yet it isn't toast yet – it's not only profitable its operating margins and cash flows have been growing. But it's a cautionary tale nonetheless for the other companies following its surfboard into public markets. Don't promise a second act you can't deliver – and by all means don't cash out before you do deliver.