“After reading your blog I put half of my whole life savings into GoPro. Help?”
Somehow I have became the go-to guy whenever GPRO stock gets thrashed. And recently, its seems like the the stock is being slaughtered down to $25 just after I announced adding a second position at $63. I receive a message from readers whenever the stock plunges. I was putting off writing this article due to other work commitments but after I received the message above, I was kinda disturbed and felt I have to push out this article.
Firstly, I want to point out that I keep a diversified portfolio of 19 stocks. Though I admit GPRO took up a significant chunk just few months ago. I think putting half your life savings into 1 stock is too hardcore. In the business world, it’s hard to predict or foresee any negative events that may suddenly surface. Why risk all your money on just 1 or 2 stocks?!?! ( I hope this reader does not have much life savings. )
Secondly, stocks shoot up and plunge down all the time. Especially growth stocks like GPRO. The moment some analyst releases negative reports, the price falls and short-sellers hop onto the bandwagon to drive the price down. Also, the moment earnings falter, just falter slightly, the price plunges like a roller coaster. I know, just few months back I was patting myself on the back with a 60% gain. Now I pretend I don’t see the big 47% paper loss in my portfolio. Thank you brain, for protecting my ego.
Am I fazed? Not really. Let me explain.
GPRO stock was getting beaten down due to weaker revenue forecasts by chipmaker Ambarella, which makes chips for GPRO. GPRO is Ambarella’s biggest customer and it did not help when Ambarella said that sales of action cameras are slowing down. That probably caused the first wave of sell-offs.
Next, some analyst released a report about how GPRO is a fad, a one-trick pony, drew reference to Ambarella’s results and added how video-capturing in smartphones like iPhone 6 will innovate faster and put GPRO out of business. If you believe that people would wear iPhones on their heads and go surfing / scuba-diving, you should probably sell off your stock too.
The same arguments of GPRO’s competitors coming out with better devices also resurfaced again in some analysts reports. However, a quick check on Amazon still shows that GPRO takes 9 out of 20 spots in the category “Top 20 Best-Selling Action Cameras”. The Hero 4 Silver takes the first spot, Hero 4 Black takes the second spot, some kiddy camera for kids take the 3rd sport, and 4th and 5th spot goes to GPRO again.
Lastly, the recent Q3 financial results of GPRO not only missed analysts estimates, they also missed their own estimates. (They estimated revenues at $430M but only got $400M.) So even though their revenues and earnings per share saw an increase of 40% and 30% respectively Q-Q, the market was disappointed. Not only that, GPRO lowered guidance for sales in the current quarter citing revenue of 500-550M, 17% lower Q-Q.
Now I would be lying if I said I wasn’t disappointed. However, my experience in business (and work) has taught me about the volatile ups and downs and the occasional headwinds that may appear out from nowhere. There’s hardly a week that goes by where I do not have to “fight fires”.
By approaching GPRO’s current situation with the same view, a long term investor should realise that one quarter of slower earnings does not spell doom and demise, even though the rest of the market thinks so. Remember, to really profit from investing, you have to be at a level where you gain insight and see value where others do not see at the moment.
Also, GPRO has no debt. It is going to close another year of record-breaking revenues and earnings. I also want to reiterate that GPRO created the category of action cameras out of thin air and is way ahead of their competitors. It still has plans to release a virtual-reality product with Google, release of Quadcopter and monetising of the GoPro licensing platform all in 1H2016. I will definitely want to stick around to see how the story unfolds.
If you are holding onto GPRO shares, be forewarned: Expect a bumpy roller-coaster ride. The market is extremely skeptical of GPRO’s ability to be a long-term business and will probably keep on punishing it. I think that’s fair considering every single new business faced that kind of skepticism at the start as well. Give the business time to prove itself.
In retrospect, I probably over-allocated too much at $63. I should have sized my bets smaller. Analysing my actions, I think that I was probably feeling “high” from making paper gains of 60% on GPRO which in turn led to my overconfidence bias (what’s new?) to dump in a hefty chunk of money into this stock.
The moment I saw the 15-18% plunge post earnings release, I wanted to shovel more money into the stock as the PE now is 22 with forward PE projected at 13. Gosh, it looks so freaking tasty!!!
But, I have decided to hold myself back and wait for the all the earnings results to be released for all my other 18 stocks. After all, I was complaining about over-allocation to GPRO few months earlier.
Stay tuned for my portfolio updates.
Notes from GPRO’s earnings webcast
– Nick Woodsman admitted mispricing the newly-released Hero 4 Session at $399. Resulting in consumers having difficulty choosing Hero 4 Session (simpler model) vs the premium Hero 4 Silver (More functions) and Hero Black.
– But, Woodsman said that they learnt from this experience that it was hard to sell against their own cameras
– After receiving feedback, Hero 4 Session was lowered to $299 in September (- leading to the negative reports from analysts)
– GoPro has reported seeing an increase in sell-through for the Hero 4 Session after the announcement. (Translation: although it had a slow start, sales of Session is now in line with expectations)
– Woodsman also admitted that they underfunded marketing in the Q2 and Q3 this year. They are taking a more aggressive marketing campaign in Q4 – return to TV ads after a 1 year hiatus. You can see their ads here: http://gopro.com/news/tags/intheworks
Conclusion: “We made mistakes and we are taking corrective actions.”
Strategic investments for 2016:
– on track to launch quadcopter in 1st half of 2016.
– spherical capture for Virtual Reality (partnership with Google) – 1st half 2016.
– new software platform for fast and easy editing. Using a Hero 4 Session, Woodsman created video turned a 40min video into 30s videoclip, in less than 3 mins. See: http://gopro.com/news/preview-on-the-fly-editing-made-easy
– no. 1 brand channel on Youtube, surpassed 1 billion cumulative views, Google informed that they are 1 of the 4 brands to reach this milestone.
– increased investment for GoPro entertainment
– releasing GoPro awards to encourage the community to share their videos for licensing ($5M awarded annually see :http://gopro.com/awards) – investment for GoPro entertainment
– 27,000 submissions within 1 week of announcement of the licensing portal
– hiring top talent for entertainment and technology ( Woodsman announced some recent hires to the team)
Woodsman reiterated that GPRO is positioned to take 4 megatrends
– user generated media
– social media
– quadcopter (drones)
– Virtual Reality
-GPRO projects a decrease of 17% in revenue Q-Q for next quarter due to release of products in Q3 instead of Q4.
My long term thesis for GPRO is still unchanged. I think humans love to take videos and photographs of themselves and GPRO offers the solution for people to video themselves doing sports or stuns. There are not many significant competitors yet.
However, the company’s ability to innovate has yet to be proven.
If you are interested to view my full thesis of GPRO and 2 other secret stocks, feel free to download my FREE stock report in the link below: