My friends were going camping recently and their bags looked like something from a space shuttle, with cords sticking out of nearly every pocket.
"What on earth have you got in there?" I asked.
A GoPro, chargers, mounting stands, waterproof containers... I tuned out the rest, to be honest.
Just like I tuned out GoPro's IPO, and will continue to ignore the stock for the foreseeable future.
It's simply not worth the investment. A trade, maybe, and only then if you're nimble and have great risk management discipline. Here's why...
Make Sure You Miss "IPO Froth"
Look, I know that GoPro Inc. stock (Nasdaq: GPRO) roared out of the gate on its IPO and climbed from $24 to a 103% gain of $48.80 in just a few days.
It could just as easily have gone the other way - and, in fact, did exactly that, hovering at around $38.80 yesterday.
The initial rise was nothing more than IPO froth based on assumptions ranging from the overly optimistic to downright ludicrous, leading one analyst to compare the IPO to Facebook Inc.'s (Nasdaq: FB). Like that's a great example of a properly priced public offering - the underwriters were sued, investors got taken to the cleaners, trading got stopped, and Wall Street hyped numbers as usual. But I digress...
GoPro's got big problems ahead of it - just like every camera company before it - and that means the company isn't worth what many think it is.
I know. I know. The GoPro cognoscenti are screaming that the company's products are the best at capturing people doing all sorts of wacky, wild, daring, and imaginative things. You'll get no disagreement from me.
But there is no compelling evidence that GoPro can provide a lasting alternative to the greatest threat to the company's relevance - smartphones.
And that's the crux of the issue. The company offers a feature - albeit a really cool one.
There's no reason whatsoever to believe that its competitors won't catch up... that Apple and others won't come out with products that match or exceed GoPro's capabilities or be easier to use.
I can already buy, for example, top of the line waterproof, HD and Wi-Fi enabled cameras from iON and JVC, both of which have better form factors and don't feel like I have a door in the wind on top of my motorcycle helmet.
Then there's wearable sport technology like the Recon Jet and the Telepathy One on the horizon. Both are considered to be competitors to Google Glass but will easily cross over.
To be fair, I have no doubt that GoPro's management is aware of this problem. And with the $600 million they raised from their IPO, they'll have the resources to tackle the problems I've just outlined.
But, I don't find that especially reassuring as an investor when looking at GoPro stock.
The $590 Million GoPro Predictor to Remember
The company's earnings per share amounted to $0.47 in 2013. That's equivalent to a PE greater than 100. To put that in context, Google Inc.'s (Nasdaq: GOOGL) PE was 31.64x its earnings, while Apple Inc.'s (Nasdaq: AAPL) PE exceeded its earnings by a factor of 16.
This lopsidedness doesn't make sense, especially when you consider the company posted a net profit of just $60 million on more than a $1 billion in sales in 2013. That's a mere 6% profit margin versus Apple's 21.7%.
Speaking of Apple, GoPro's going to have the fight of its life on its hands once the Cupertino giant upgrades iPhone cameras that can take as good or better pictures as the GoPro product line.
I'm reminded of what happened to Flip...
If that doesn't ring any bells, Flip was the revolutionary camera system Cisco Systems, Inc. (Nasdaq: CSCO) purchased back in 2009 when it shelled out $590 million for what it believed was the wave of the future.
But it took barely two years for Cisco to drop production of the phone, announcing in April 2011 that it would "exit aspects of its consumer business," which turned out to mean shutting down production of Flip. This was at a time when sales of the camera were actually continuing respectably, but Cisco could see the writing on the wall.
So far, GoPro has broken through this roadblock with an innovative design and a rabid fan base... for now. It's a nifty product and cool to use but there's no reason to think that this camera will stay ahead of the pack, or prove able to withstand the slumping demand that will always be a threat from constantly improving smartphones.
People who buy shares of this company on the hope that it will are making one of the most common investment mistakes out there: investing based on casual intuition or hype surrounding a stock, rather than solid market research.
The IPO Game Is Rigged. Here's How...
It's important to remember that a large part of IPO surges these days is artificial. Underwriters like JP Morgan Chase & Co. (NYSE: JPM), Barclays Plc. (ADR) (NYSE: BCS), and Citigroup Inc. (NYSE: C) have a financial stake in these debuts and it's their job to create hype around the stock to pad their own earnings as the deals go through. It's not for nothing analysts presenting the company go on "road shows" replete with glossy charts that would make an old time carnival barker proud.
I've written before about how IPOs are rigged by insiders.
Founders, big banks, and the very first investors are the only players who stand to make real gains here, either in the IPO itself or the trading down the line.
And remember: retail investors who buy in on the IPO are the last in line, which also means they're the most at risk.