1 GoPro Case Study Rutgers Team Rutgers Business School Lawrence Feltz Yunqian Zhang Wanjing Wang 2 Table of Contents Executive Summary……………………………………………………………………………. Introduction……………………………………………………………………………………… Analysis …………………………………………………………………………………………... Prediction/Conclusion…………………………………………………………………………… 3 Executive Summary GoPro ticker symbol (GPRO) is a technology based company that specializes in the sale of small video recorders that are used mainly in action sports and events. However, the company is attempting to branch out into the general media. Founded in 2002 by CEO Nick Woodman after a failed business venture, GoPro decided to explore the world and found a need to record his surfing adventures and a lack of such a product to meet his standards. So with initial investment by his parents of 235k he started Woodman labs later known as GoPro. The Firms current Market Cap according to NASDAQ.com is 5.6 billion. The companies price Peaked at a 52 week high of $98.47 and had a low of 28.65 as a disclosure the company went public on June 26, 2014 and this period is when prices were lowest due to the initial IPO. It is currently valued at 45.21 and has been on a steady decline since mid-October. We believe that there are three main reasons why this well-known tech company will go bankrupt by 2020. First and foremost they have for the better part of a decade been uncontested in the action camera market and according to some analyst own 90% of this market. A product such as google glass which has yet to reach the broad consumer but could within the next year would not only eliminate any foothold that GoPro has in the market of action sports recording. The features of google glasses along with a similar product that was announced by Sony would not only allow people to record whatever they are doing but expand into their social media with much more ease through 4g or Bluetooth rather than the GoPro approach of solely Wi-Fi. As a note if both google and Sony are committing major capital to these projects a company such as apple or Microsoft will not be far behind further shrinking market share. 4 Our second major justification for why GoPro will fail is in how they are trying to expand. They make it a point that they are not just a video recording company but a media company as well. However in our view they are very inefficient in posting content relative to how a Sony or a google might be able to. GoPro’s main target demographic is generally younger athletes who want to be on the cutting edge of technology. Google glasses through vertical integration of YouTube which is owned by google, GoPros consumer base would see the extra steps required to post content to the largest audience possible and this restriction is GoPro’s own application which limits rather than directly to YouTube as would be possible with google glasses. Our third point is looking at the bigger picture what is GoPro and what is the overall outlook for the economy. First and foremost GoPro should be looked upon as a leisure good considering the activities that are often recorded on them are expensive. Since the United States Economy is cyclical and the bottom of the recession was 2009 we will be due for another economic downturn within the next 5 years. Looking at the global economy the only country that is exceeding expectations is the United States, Europe is in shambles over the debate with Greece, China’s economy is facing growth rates it hasn’t seen in 20 years and there is still massive tension in both the Middle East and Eastern Europe. Eventually there will be a tipping point and since the Federal Reserve is projected to increase interest rates by June borrowing in the United States will become more expensive thus slowing the United States Economy. The first thing middle class consumers will cut is both expensive vacations and Luxury items both of which are vital to GoPro’s success. This is not to say that google glass will flourish in this time but rather google and Sony are not dependent on their video recording software while it is GoPro’s only product we believe that this leaves GoPro 5 incredibly exposed to the market and they have done very little to diversify their product line resulting in limited flexibility in an economic downturn. Introduction GoPro enables consumers to record picture and video when they are doing activities. Literally, it indicates that their target market is action camera market. Right now, they have captured 90% market share in this specific market, which means it would become increasingly difficult for them to sustain or increase their revenue growth rates. Because of economic recovery in U.S., sales of GoPro overseas represented 56% and 34% of their revenue for the three months ended September 30, 2013 and September 30, 2014. U.S. market takes a larger part. Their revenue would be greatly influence by U.S. economy. However, before 2020, there may be a decline in the global economy. Analysis Actually, they are facing a huge number of highly competitive companies, such as Canon Inc., Nikon Corporation, Olympus Corporation, Polaroid Holding Corporation and Vivitar Corporation, large, diversified electronics companies such as JVC Kenwood Corporation, Panasonic Corporation, Samsung Electronics Co., Sony Corporation and Toshiba Corporation, and specialty companies-Garmin Ltd. GoPro’s net income for the nine month ended September 30, 2013 and September 30, 2014 is only 3% and 1% of their total revenue. Compared to their existing competitors, their net income takes a very small share of their revenue. The net income of Canon accounts for 6.836% of their revenue, which is larger than GoPro. On September 30, 2014, their operating cost takes 41% and cost of revenue takes 57% of their revenue. In this 41% operating cost, research and developments takes 14%, sales and marketing takes 18% and general administrative takes 9%. Even if they prefer to cut cost before 2020,there is not much 6 space for them to do so. They have to invest a lot of money into R&D session, because this is the point they are attracting consumers now. Without a creative R&D group, their product may not be special any more. Their sales and marketing session also takes a large share, but unfortunately, GoPro may not be pretty confident to cut their budget in this session. If they decrease their investment in advertising their products, it is pretty difficult for them to maintain their market share. The only thing they can do is to cut their cost in general administrative group. However, it would not be easy and even they are able to do so it would not help much. Now 166 out of 970 employees are in their administrative department. This group is responsible for customer service and other general administrative issue. Because GoPro has already published several versions of cameras, they need to maintain the customer relationships. GoPro has to keep the majority of them stay. Otherwise, it would bring an adverse effect for this brand. If GoPro let 30% of employees in this department leave, the cost they may save is only around 2%, which means their net income would be 3%. Compared with other competitors, it may not be a very shining number. At this point, their net income has decreased from $16,849 to $5,828(Thousand), which is odd for their increasing revenue. What’s more, we may need to notice that camera is their only product. For a star product, the return of revenue is only 3%, which would be a huge risk for GoPro. Since they only have one product line-HERO, they do not actually compete with any direct competitors in action camera market. GoPro may not realize what kind of competitors they will face in the future, because they did not directly compete with any big companies previously. If any stronger competitor get into that small market, they would be influenced a lot. If their market share is affected by any negative factors, they would face a huge challenge, because it is their market share that supports them to have net income. If any big player, like google, enters this market, GoPro would lose their opportunity and suffer more risks. 7 Actually, Google has already entered this market. The video platform GoPro is trying to build would be influenced by YouTube. If people are able to upload the video to YouTube directly through Google glasses, they may not transfer their video to GoPro App and then use this app to upload video. The whole process is a little complicated. If Google put foot in this business. Customers may not be willing to go through GoPro’s process. If any big player prefer to put foot into this business, they would be very competitive .They are bigger, their assembly would be more efficiently, which would decrease the cost of each unit. In this way, GoPro may become an obsolete product. As GoPro mentioned in their 10-K, they are dependent too much on their CEO Mr. Woodman. From a management perspective, it may not be a wise strategy. He earned a B.A. degree in visual arts and a minor in creative writing. He may be creative but may not be talent in business. Normally, we utilize the time series models to further forecast a company’s demand and predict its tendency of sales. However, Gopro is such a new public company that it only has two quarterly 10-Q on the U.S. Securities and Exchange Commission (SEC). Two quarterly sales data are not enough for investors to conduct the time series methods and therefore they are not able to predict the future of GoPro’s sales. SEC is an independent agency of the United States federal government. “The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation,” (Sec.gov). The SEC requires public companies to disclose financial and other information to the public. This knowledge allows all investors to judge for themselves whether to buy, sell, or hold a particular security. This information is accurate and reliable so that people can make sound 8 investment decisions. Lack of transparent information prevents GoPro from optimizing its valueadded chains. The direct consequence is low operational efficiency and poor supply chain management. Poor supply chain management will reduce GoPro’s competitive advantage. Especially in the current tendency towards globalization, efficient operations and excellent supply chain management determine customers’ satisfaction. Customers’ satisfaction directly impacts the future of GoPro’s market. By analyzing the cash flows in GoPro’s quarterly 10-Q on SEC, we can see that the net income has reduced from $17,950 in June 30, 2013 to negative $8,792 in June 30, 2014 (cash flow reduced by 51%); from $16,849 in Sept. 30, 2013 to $5,828 in Sept. 30, 2014 (cash flow reduced by 65%). This provides the information which highlights the cash flow issues, such as delay payment to suppliers, no enough cash to invest in Research & Development (R&D). As we know, GoPro’s competitive advantage comes from its high-quality (fully waterproof and shockproof in its hard plastic case), leading-edge products, design and manufacturing of its value-chain activities and its deep relationship with surfers and extreme sports athletes. With this tendency in its cash flow reduction, GoPro will face difficulties in continuous improvement in its value-added chain that supports its leading-edge products. We also adopted Porter Five Forces Analysis to determine the competitive intensity which affect GoPro’s ability to serve its customers and make a profit. GoPro’s niche market is developing and more rivalries have been attracted into this competitive camera industry. Low entry barriers and growing demand threaten original GoPro target. In addition, some generic competitors already have the technology. The large number of suppliers has further encouraged 9 competition. Many competing products can provide the same benefits. By 2020, GoPro will not able to compete with other rivals such as Google who have strong financial sponsor in R&D and finally will be forced to leave the competitive camera industry. . Prediction/Conclusion Our prediction for the future of GoPro is bleak to say the least. This week’s example of allowing such a surplus of their stock to remain knowing the lockup period was about to expire shows an extreme level of mismanagement since this information has been known for months. The stock has fallen 46% in the past 3 months and appears to have been overvalue by companies such as jmp when they were trading at close to 100 dollar. The action camera market is one that is dependent on predominantly Athlete and people who regularly go on vacations that in and of itself is in our view a niche market that has yet to be fully explored. Currently their main competitors are Sony, Panasonic and HTC however we strongly believe that with the growth of the general action video market the only reason that this competition hasn’t been successful is that they were relatively late to join the market and as a result did not have the infrastructure that GoPro started creating in 2002. If the big players of Silicon Valley (apple Google) market correctly the wearable technology that are already patented then it is a clear and easy jump between the wearable action camera market and the wearable camera. Since the current president of the company is Tony Bates former CEO of skype which was acquired by Microsoft we do see the potential of him pushing for a sale to a company like Microsoft rather than filing for bankruptcy if the company stocks and potential profits fall. This is outweighed by the CEO and owner of the company Nick Woodman who on multiple occasions has stated unequivocally, faith 10 in his company and the future prospects. This could lead to a potential clash of management which under the stress the company’s stock has been the past three months is most likely a conversation that is already being had. Looking at who we believe will be the largest threat over the next 5 years as is with most technology companies is google. While initially claims of privacy violations with the first public prototypes did arise these concerns do not affect the action sports market as there is no general violations of privacy being violated. Thus when google glass becomes available to the consumer brand recognition and the demand to have the newest iterations of whichever product apple and google release it is fair to conclude that since GoPro’s market is generally younger individuals they will be inclined to go with google glass rather than a GoPro. In terms of recording capabilities both GoPro and google glasses are capable of recording in 720p HD. On a general outlook for the economy the conclusion we reached is that there is likely to be a downturn or recession of some kind within the next five years. The way we reached this view is twofold first generally speaking the United States experience a period of economic decline once every 7-10 years it is the nature of a cyclical economy and since the recession was in 2008 the United States is due for a dramatic decrease in growth. There are several factors that could spark this potential decline and they are not all mutually exclusive. The instability in Europe due to Greek debt, Interest rates increases in the United States interest rate and a decline in the growth rate of china a market GoPro wants to explore are only a few factors that lead us to our conclusion. So why does this decline directly affect GoPro? When people they have extra time to do sports, when would come up with the idea that they need a GoPro. If economy goes bad, people may not have that extra money and extra time to record their activities. Thus, the action camera market would go down. Even if GoPro takes a large share in this market, they net income would decline greatly. 11 Based on what we have mentioned above. Since the target of GoPro would become more and more competitive, GoPro’s market would be influenced. Even its 90% market share drops to 80% market share, it is hard to say the GoPro would continue to keep its positive net income. is This is a world with high-speed revolution of technology, so it is very possible in five years GoPro’s camera would become an obsolete product. Then this small market would be totally taken over by another product. Because of the existence of economic cycle, the scale of whole market would also shrink. .