This past week, GoPro, the super action camera/video company, brought itself public. Demand for the stock was strong, valuing the entity at more than $4 billion by the end of the week.
Many investors will take note and wonder if they should jump on the GoPro bandwagon. However, before you do, ask yourself a few questions.
Are you a gambler with your investments? If yes, then maybe you have fun trading the stock realizing you may lose everything.
However, if you are a long-term investor, then you need to perform a very different fundamental analysis.
In analyzing GoPro, a bit of a history lesson might help. Although history may not repeat itself, it does rhyme.
Just seven short years ago, Garmin, the GPS company, was a Wall Street favorite. For a “directionally challenged” idiot like me, the invention of GPS has been right up there with indoor plumbing and sliced bread.
Garmin stock was trading for $125 a share and could do no wrong – and then, the smartphone came along. Who would ever guess that a phone would completely disrupt a map and logistics company?
Virtually overnight, the smart phone upended Garmin’s business model because it allowed people to have immediate GPS on their phones. They no longer needed to buy the separate Garmin unit. With that, the advantage Garmin once possessed was greatly diminished and its business model severely damaged.
Today, Garmin trades for $60 a share – less than half of what it did at its peak in 2007. Sales are now less than they were in 2007, and current earnings are a full 36 percent lower than they were in 2007.
Use this as a cautionary tale when assessing the hurdles GoPro will face.
Ask yourself, “Does GoPro offer software that is unique? Is its hardware unique?” In both cases, the answer is no. Even if it has “first mover” advantages, it can be replicated with relative ease.
Although I’m not an inventor, with a small amount of imagination, I can easily envision a case that transforms the camera on a typical smart phone into a GoPro alternative.
For years, external cases of this nature have existed for the high-end photography market to take traditional cameras underwater. You can also do an Internet search for “underwater camera case” or “camera suction mount” and see a variety of substitute products already for sale.
This quickly makes me question how defendable the protective barriers to entry are that surround GoPro stock. It should be common sense that the more substitute products exist, the harder it will be for GoPro to charge more in the future. This will limit profitability and hinder growth.
As such, the GoPro lineup may be cool and fun to use, but it does not necessarily make it a good investment. As we have seen repeatedly with things like the invention of the automobile, air travel and the Internet – just because something revolutionizes the way we live does not make it a good investment.
Furthermore, just because a company goes public does not mean you should chase after it. Oftentimes, the reason the founders, insiders and investment bankers of a company sell their stock to the public is so they can cash out. Many times, this can leave external investors holding the bag.
This should reinforce a simple investing concept. Some of the best long-term investments require the least amount of technology and experience little change over time. This also reminds us that successful investing does not require rocket science but does require the discipline to recognize the difference between a fun product to use versus a solid long-term investment for your portfolio.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.