I read an article the other day on TechCrunch that I’d summarize as “Forces are holding Silicon Valley back from creating viable hardware companies.” One of the reasons that sticks out in my mind most from the article is that the largess of the incumbent players in the consumer hardware market make it extremely difficult to enter said market. The article used the recent stock gyrations of GoPro and by extension, the talk that the firm may be up for sale as proof of such a hurdle in the market.
I don’t know if GoPro is up for sale and I don’t know if they should sell. Heck, I don’t even know if you should buy or sell the stock – use your best judgement, not mine. However, I was interested if their financial data would show some sort of barrier to entry issues that has caused financial issues with the firm. For this exercise, I took a look at the quarterly income statements and balance sheet data (Courtesy of AmigoBulls), as well as the quarterly stock price for the firm (From Yahoo Finance) for the term of March 2013 to August 2017. The firm’s statements would indicate it went public in somewhere around June 2014 with an initial price of $24 a share, a little while after it officially adopted the name GoPro. The financial statements also contain data prior to the IPO that I assume is part of the regulatory filings necessary before the initial sale.
When you have a look at GoPro’s numbers it appears as though it’s a company that’s doing not terrible. Below are the Net Sales, CoGS, and Net Income.
Through January 2016, the firm seems to be growing quite well, with the rather predictable Christmas bumps in the numbers. There’s no spectacular growth here so it’s probably moving to maturity in the market with the current products it has.
The sales to cost of good sold remains more or less congruent through the period. That would indicate there hasn’t been any shenanigans with suppliers or absurd price pressure from ones with larger economies of scale. I’d assume that after January 2016, the low price competitors have entered the market and had begun swipe away the low hanging fruit, hence the drop in net income. By the next year, it would seem GoPro had puzzled out some responses to the invaders.
Looking at the Balance sheet, it would appear that these numbers would support a re-targeting of the firm by investing in areas where GoPro could best compete. This could be reflective of the drop in retained earnings and the increase in assets and liabilities. I’d assume the retained earnings were re-invested rather than being returned to shareholders during this period.
Going back to the income statement, it would show that R&D pulsed at the time sales dropped and had leveled off in the second quarter of 2017 where I’d assume those development efforts moved to production and instigated the need for capital spending support, thus the uptick in assets and liabilities at the end of the previous graph.
While I’ve dug out nothing more to go on – call it looking for Occam’s Razor…or laziness – this would indicate to me a rather stable firm with a management group that’s on their game at some level. But more importantly, these findings fail to indicate any tremendous pressure from a large established consumer electronics firm bent on crushing outsiders.
So where’s this insurmountable barrier for Silicon Valley hardware startups?
I think the real culprit can be found when looking at the movement of the stock price. Here’s the quarterly stock price for the firm for the same time periods above:
When you put the stock price up against the previous income statement graph, the issue becomes clear. In the beginning, the stock price seems to be independent of the movements of the underlying company metrics but falls more inline around January 2016.
Here’s my favorite graph so far.
What you see here is the average trailing PE for consumer electronics (and office) products as offered by Sterns in red. It’s the PE for the entire industry. The BLUE line is when you take the first quarter share price of the newly public company and use it to calculate the three quarters BEFORE launch from the provided EPS. After launch the blue line is calculated by using the real EPS divided into the correlated share price. The smaller spike before January 2015 is the IPO issuance.
My takeaway is it’s not that Silicon Valley cannot produce a competitive hardware company, it’s that they can’t price a hardware company for IPO adequately at best, and perhaps they don’t really understand the investment requirements that physical goods companies require at worst. What’s worse is investors to this day use that hype induced IPO spike as a barometer of the company’s real worth going forward – (a tribute to the power of behavioral finance and perhaps bad VC profit harvesting practice) damning the firm to under-performance perceptions going forward.
Further, GoPro may be a fine company at the scale it is now – and perhaps this is the scale it always should have been considered at. Pumping its stock price to the stratosphere served only to hurt the firm in the long run, which is why what seems to be a perfectly fine company has to fend off rumors of a potential sale rather than incrementally building itself – which is what most solid companies do that are not founded in Silicon Valley.
In the end, GoPro, TechCrunch’s pinata, may actually be priced pretty closely to fair right now, too bad it wasn’t in the beginning…but your metrics may vary.