GoPro (GPRO) Flashcards
Meeting with CRC 9.15.2015
GPRO
• Summary: Came out of the meeting surprised by the how bad things actually are – his reads were more negative than a thought and he gave me clarity around how useless some of their initiatives are. I’d recommend shorting AMBA right now at this level because sports camera sales expectations are too high for the stock in FY16 / FY17based off of the information I’ve heard today (GPRO makes up ~97% of their action camera segment). I’d also recommend shorting GPRO into Q3 and early Q4 for several reasons:
o 1.) Channel checks are extremely negative and Chicony Electronics (manufacturer of GPRO cameras – about 60%, other is a private Chinese company) sales have shown a strong decline over the last three months. Estimates for Q4 and FY16 & FY17 are too high right now and need to come down
AMBA in their call guided their sports camera segment to be down YoY and flat sequentially which telegraphs an upcoming slow quarter for GPRO
o 2.) In no scenario does the post earnings reaction look positive. It’s a longshot if management reaffirms guidance for Q4 – every data point is negative. I wouldn’t even be surprised by a pre-announcement. Only scenario where things turn is if GPRO announces some brand new product which is highly unlikely based off of Chicony’s sales (sales showing a decline so any ramp in new camera production would’ve been seen at this manufacturer). GPRO also wouldn’t risk throwing the new product ramp on one supplier.
o 3.) I think going into Q4 with current trends, GPRO will see their margin get squeezed for three main reasons
Mgt. mentioned they would be increasing advertising expense and Ben noted it would be partially through adding in-store staff to show consumers the product
Last holiday season he noted they also offered discounts in the form of gift cards with the camera for you to spend in store on other products (GPRO ate that cost) – I think with the way units are tracking this is even worse this year
Even more important is the incremental buyer for GPRO’s is not the super duper action packed daredevil, it’s the mom and dad who may not need the $399 or $499 camera with all the bells and whistles. Lower margin cameras should dominate in Q4. Ben noted margins had been pretty steady but I think Q4 could be an inflection point based off mgt’s desire to hit quarterly numbers
• I’ve built a tracker for Chicony to track monthly sales – we will get one more read at the beginning of October so I will send an update when that comes in. This will allow us to see if sales have stabilized or continued on their current path
• Big risk to the current quarter (GPRO reports Oct 30th) – “July sell through was good” but August is when things “really dried up”. Channel checks noting growth went from 93% YoY last quarter to 50%, then 30%, then 20%, then mid teens (his analyst just got back from the IFA conference last week so this is current)
o Channel checks with distributors went from positive to negative
o Total FY15 estimates for shipments was 7.5m-8.0m, now that is 6.5mm-7.0mm – some contacts even suggesting 6mm but he noted they tend to overshoot on both ends
o Called out sell-through to China as disappointing, part of it related to Xiaomi competition but more just the market slowing down
o Called out Europe where sell through has “slowed faster than they hoped”
o Similar to what the CEO had said at the Citi conference, Hero Session camera sales have been a big disappointment
o Q4 could be down in the mid-teens YoY in terms of units
• Key theme throughout the meeting was the overall market is slowing down – it didn’t seem like it was pausing – GPRO is roughly 65% of the market so it will be indicator for overall momentum. “TAM hasn’t developed as people thought”
• Why has stock traded down? - No new major products this quarter, CEO noted session was below their expectations, buyside extremely skeptical of GPRO
• Every initiative he mentioned other than the drones either was behind the tech curve or too small to even make a difference
o GPRO Movie / Photo Storage to the Cloud – copying GOOGL who allows you to do this already with its GOOGL photos app (unlimited storage). GOOGL has a much more advanced platform that makes videos for you with a group of your photos or videos
Skeptical GPRO can get there, they haven’t even announced it yet
o Another idea is the 360 camera and multi-lens product – both of these would be extremely expensive and only target a niche market. They also aren’t even in the pipeline for 1H 2016
o GPRO app had a setback with their new app update – used to be able to upload 4k content from camera to computer through wifi but now you can no longer do that. Consumer now has to plug in their camera just like before
• Drones – expected to come in late Q1 2016, mgt.’s noted 1H 2016 so there is the possibility this gets pushed out. Initial drones will not have the camera embedded to it
o Drone differentiation comes from the ability to autopilot, the drone can take off, land, and follow the controlling human (I think this is positive for the consumer making it easier for kids / older people to pilot them)
o Real focus is the camera so the controller will be focused on controlling the camera and less about manual drone control – this is what he said but I can’t imagine GPRO will alienate the true drone followers by not allowing manual control so I think their drone would be autopilot as the standard but enable the controller to also take more control over its movement
o He currently has 200k modeled right now, thinks 400k is easily achievable and 1m units is the high end target. Believes the street doesn’t have this modeled in right now (from what I’ve seen, he’s right)
• Valuation
o Street has 57% sales growth modeled for Q3, 12% sales growth modeled for Q4
I’m modeling something near 40%-45% and 0% based off the slowdown
He sees downside of 150k units off of 1.65m expectation, I assume slightly less downside of 130k which means things slightly stabilize from their current trends
o FY16 and FY17 sales growth rates are 20% and 14% - with the way cameras have slowed down I wouldn’t be surprised if those topline growth rates drop to 10% and 5% with more downside
o On EPS, the street has $1.82 for FY15, $2.10 for FY16 – based on the information today, FY15 comes in at ~$1.65, with the range being $1.60 - $1.70. At $1.65, the stock is trading at 20x FY15 earnings
9.17.2015 Meeting with GPRO Mgt.
Surprisingly small group. 3 of us from Moore and 4 other investors. I guess that’s a function of being a consumer conference, not a tech conference. See bold below. Blaming education process on different products, not pricing. Also pointing out that they just want to get people into the ecosystem so HERO is doing that job, but it’s a significantly lower revenue product. Also said mix hasn’t changed so confusing why that matters now and didn’t in the past.
• Session
o it’s great - small, durable, water proof below 30 feet, simple to use
o however, it’s different - when something is different, it is harder to market… if you walk into BBY and ask about GPRO, they’re going to sell you the Silver and Black… if a consume asks about the Session, “they just say it’s smaller”
o we need to get the message out more
o into the holidays, Session is incremental on shelves, not replacing anything
o “think people will wake up in a year and realize this is a great product”
o “I do not think that pricing is driving confusion. Education is driving confusion.”
• HERO
o personally, don’t understand how anyone can use these products without wi-fi
o didn’t disclose product mix last year, but will say it’s been a pretty steady mix
o consider the cheapest one ($129) as just a stocking stuffer - people will get that and some will trade it in for a higher-priced one and others will use it for a while and decide they want to upgrade it
o we want to get people into the GPRO ecosystem and this is the starting point, but it’s not the ending point
o “we’ve sold a lot of these, but we need to sell 3 to hit the revenue of the Silver so we obviously want people to buy Silver or Black”
• we believe video is changing over the next 5-10 years and we need to be in a leadership position for that
• Quad will be out in 1H16
• get data daily on inventory levels at retail, but certainly not going to comment on it mid-quarter
• “I don’t ever want to be in a position where I make a quarter because I jammed the channel. That’s just not good for anyone.”
• “We don’t really discount. If we were to do something, we would just change prices. Our pricing has worked very well though.”
Context was Rami asking about current inventories in the channel and CFO yelling at him for asking a question he wouldn’t possibly answer. The whole meeting was clearly negative but tough to figure out if it’s factored in to the stock.
The part about education is more telling BBY how to sell. They just don’t know the product well enough so they default to selling the ones that are the same price but they’re more familiar with. Trading in the camera – he was talking about how a grandma might buy it because she knows the grandson wants a GoPro so she just buys the cheap one, but the kid actually wants a better one so he trades it in immediately. The other possibility is it ropes someone into the ecosystem and then a year later that person buys the more expensive one. Not saying I agree, but that’s what he meant.
