Ilja Enger-Tsizikov
Ilja Enger-Tsizikov
Over the last three years, GoPro (NASDAQ:GPRO) has been building positive business momentum and steering itself into product and financial stability. Through several changes I've outlined over the last few years, the company's execution was solidifying, and the business was seemingly turning a corner. That is until this May, when it decided to go back on all of those changes and return to prior failed strategies. Its Q4 earnings results not only exposed the failed results of this reversion but proved management is incapable of understanding these changes are impacting sales and subscribers, chalking it up to sudden "consumer behavior" changes. GoPro looks to be headed down the wrong road once again, except there may be no saving it this time as its cash pile will be a fraction of what it was years ago.
GoPro is once again in trouble as growth has become less and less viable as its sales volume continues to lack growth. But it's not because management hadn't figured out a working strategy. Its "genius moment" over the last five years has not been implementing a useful subscription/cloud product but how it marketed it later by reducing the camera product price and bundling the subscription. Using this strategy, it grew subscribers from 400K in August 2020 to over 2.5M three years later.
It worked, and the company was on track to start a high-margin revenue business not directly related to hardware, providing a desperate revenue diversification.
If not for the company's strategic move to work on a subscription-based product and reduce its camera price to get customers in the door on the subscription, the company would have likely run out of cash by now.
As a baseline, the company had revenue of $1.0B in 2023 versus $1.09B in 2022. The company earned $97M in revenue for its subscription service in 2023. Without this, the company's revenue actually dropped to $903M, down 17.2% year-over-year instead of down 8.3%.
"But, Joe, you can't subtract the subscription revenue. It did earn it, and it's a part of its business."
Yes, absolutely. So then I ask, "Why did it change the working, successful strategy?"
The company ceased bundling the camera with its subscription in May, and this is the first holiday season without it. It showed up big time with only 12% growth in subscribers in 2023 over 2022, the slowest growth rate since enacting the bundling strategy. But looking at Q3's subscriber numbers of 2.5M and 2023's year-end number (Q4 numbers) of "more than 2.5 million subscribers" means there was little to no growth in Q4. This is corporate speak to say it grew, but not enough to want to show how low it was. In other words, nearly all the 12% growth came in the first half when the bundling strategy was still in place.
Clearly, the shift in strategy produced poor results.
Lest you think I'm cherry-picking results or spinning numbers, the company said it was "positioned to generate more than $100 million in annual recurring revenue" as it exited 2022. Yet in 2023, it added more subscribers - 250K over 2022 - but only generated $97M in subscriber revenue. So not only did it not generate more than $100M in revenue, but it was short of the goal. That doesn't equal "generate more than..."
This is a serious problem.
Furthermore, guidance for 2024 expects very little growth year-over-year in the subscriber department. Management's guide was extremely weak:
We expect to end [2024] with between 2.5 and 2.6 million subscribers, or 4% growth year-over-year at the high-end of the range. This assumes renewal rates consistent with what we’ve described earlier.
- Brian McGee, CFO, GoPro's Q4 '23 Management Commentary
Clearly, the shift in strategy is producing a steep slowdown in growth, with the sequentially flat subscriber report for Q4 already setting the stage. And with guidance for not seeing any net-add subscribers in 2024, I'd say someone needs to wake up in the C-suite and return to the bundling strategy.
But if this wasn't enough, the company also decided to return to entry-level products, which it moved away from because it created consumer confusion and cannibalization, not to mention added expenses and manufacturing complexity. A comment from Q4's earnings release couldn't better explain the complete obliviousness of management on this front:
Fourth quarter entry-level camera sell-through, priced at $199 and $249, represented 28% of our product mix, up from zero in the prior year when we had no products offered in this price band. However, in analyzing our 2023 holiday season performance, we believe consumers were looking for discounts irrespective of already low price points – which was an outlier from the behavior we’ve seen in prior years. This resulted in lower than expected sell-through of our $249 HERO10 Black product, which we did not discount during Q4.
- Nicholas Woodman, CEO, GoPro's Q4 '23 Management Commentary
It figured out what it needed to do a few years ago by simplifying its lineup, discounting products appropriately, and driving subscribers. Now, it's undoing all these decisions, and the real-world feedback has been as quick as possible, and it's not good. Yet, the company appears lost in why it's happening and isn't indicating a pivot back to the working strategy.
With an absent 2024 revenue outlook but guidance for improved gross margins due to higher subscription revenue and lower-cost entry-level cameras, the company is staking its future on expanding its appeal to more consumers. But again, the last time GoPro tried to launch more cameras and do it in Q2, it ended poorly.
I don't know why management thinks it can enact the same failed strategies from years past and expect them to turn out differently this time. The worst part is, the same bad results are already pouring in.
The Q4 call came across like the company is moving forward when, in fact, it's reverting to all the failed strategies it moved away from to stay in business several years ago. Moreover, management comes across as baffled as to why consumers didn't stick with the trends it has seen over the last few years when the company's shift in strategy would completely account for it. Simply put, consumers got used to the years of discounts and add-ons. At the very least, the strategy should be to revert to the discounted bundling strategy with the GoPro Plus subscription and continue to build its subscriber base. $100M in revenue per year is not enough to buoy the company; this revenue center needs to continue to grow.
It appears the company has not learned from its past mistakes and has reverted to the same tactics that led it to make the wholesale changes in the first place. I haven't even touched on its acquisition of an Australian helmet company that was just about to go out of business. This only adds to the complications of its business and will increase expenses. GoPro thinks it can pivot to this new marketing strategy and product lineup and take on another company for a market it has never been in, with cash on hand down $121M year-over-year to $247M. If these strategies fail - which they already are showing up in subscriber numbers - the company won't have a cash pile to fall back on.
The risk to the upside is if consumers somehow make an about-face from their Q4 trends of waiting for discounts and signing up for GoPro Plus faster than others churn out. Moreover, the new products, released in the worst part of the year (according to GoPro's past commentary), gain immediate traction and provide substantial sales to allow the company to see meaningful growth. Only this will provide some semblance of hope for the company to make it out of 2024 without limping.
But if there's a company out there that can handle this task, it's not GoPro. I would stay away from the stock after the three-year-long selloff. However, if you're long like me from lower levels, there may be a dead cat bounce in the near future to exit your position.