Last summer we penned an article outlining concerns over GoPro—the super action camera/video company which had just brought itself public. At the time, the demand for the stock was red hot sending its price from the low 30s in late June to more than $93 per share by the end of September.
In the article, we pointed out that GoPro did not have any meaningful patents protecting their products making them susceptible to new competition. Furthermore, we stated “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.”
Recently, that is exactly what happened; Apple was granted a patent which covers a remote-controlled, digital camera that can be attached to a helmet, surfboard or scuba mask.
So what has happened to GoPro? In less than three weeks the stock is down more than 30% and it has tumbled 50% from its peak. And this reaction is before Apple even has a product. Currently, they just have a patent—but it shows just how vulnerable a company like GoPro is.
If you owned GoPro, this is most likely very painful. Given this, what can investors learn going forward?
When my students at Texas Lutheran University present companies for inclusion in their portfolio, a question we always ask is, “Could Apple or Google, with their massive bank accounts, invent a viable competitor?” If yes, then there is probably not a “protective moat” keeping new competitors at arm’s length. Obviously, a lack of moat makes a logical investment much harder to justify.
When any business posts massive sales, operating margin or net profit—basic economics dictate that competitors will this, and enter the market place. In the process, the opportunity for “excess” profits is challenged. Absent a significant barrier to entry, you are asking for trouble.
Is your investment predictable and consistent? Can you reasonably estimate what revenues and earnings the company will make over the next decade? If not, then how can you assess a logical future price? Furthermore, how can you determine whether or not you are getting a bargain or overpaying?
Yes, new technology is often cool. It evolves so quickly we are guaranteed of having fantastic new products every year. However, that does not make “cool” or “new” 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.
Some of the best investments are old and downright boring. Warren Buffett has repeatedly said technology is not going to change the way we chew gum. This reinforces his preference for simple, predictable and consistent businesses like Wrigley’s, Dairy Queen or M&M’s.
Additionally, it is helpful to pull regulatory filings to see what the insiders are doing. In the case of GoPro it should surprise no one that after the initial “lock up” period associated with the initial public offering where they are prohibited from selling, insiders began unloading shares. Many of these liquidations were very close to the all-time high levels.
You have to be careful with insider selling as they will sell for a variety of logical reasons. However, if you see meaningful buying in the open market (as opposed to exercising of stock options) it can be a good indication that the people who should know the most see good things.
In the end, wise investing should not be hard. You are buying a business and attempting to assess what assets that business owns and how much money they should make as a result of those assets.
However, the discipline necessary to implement these “simple” ideas continues to be illusive to many investors as the temptation to chase after “cool” dominates “logic.”
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.