Sunday, October 18, 2015

Kicking the Tires on GoPro

For the past year and a half, the financial blogosphere has been inundated with posts touting the pros and cons of GoPro (GPRO). There's never been too much of an argument as to the quality of their high definition camcorders - very popular with millennial daredevils and outdoor enthusiasts. However, the perception that GoPro is more than a one-trick pony was greatly distorted in its first few months as a public company which caused it to accelerate to the upside.

Originally, traders bid the stock up with the expectation GoPro would build a media company with original content created with GoPro camcorders. You probably remember the catch phrase "content is king" back in the late 90's. Unfortunately, it couldn't supplant the 800 pound gorilla in the space, Alphabet's (GOOG) YouTube. Although GoPro has a very successful channel on YouTube, it doesn't generate enough revenues to command the lofty valuation it once did.

The stock got as high as $100 during its first few months of trading, only to come crashing down to $28, roughly $4 above the IPO price of $24. Almost a round trip ticket.

Examine the chart below:

Source: Stock Charts

The extreme decline in share value may be a tantalizing entry point for some investors, especially if they're familiar with GoPro's products. However, there's a 30% short float on the equity, so many traders believe the stock has more room to go to the downside.

I've read arguments that there is potential for quick profits for GoPro bulls with the advent of a short squeeze, and this may be true, but not at this juncture in my opinion. I tend to side with the shorts and think that although there is a future for this company, whether as a stand alone entity or part of a larger conglomerate, the next quarter will be tepid. The next earnings call is scheduled for October 28th, and I'm waiting for company results at this time before I put any money to work, if at all.

Short Term Bear Thesis

  • High Definition semiconductor manufacturer Ambarella (AMBA) warned that Q3 would be flat in their last conference call. Ambarella is GoPro's primary chip supplier. Although this news caused GoPro to sell off significantly, the damage may not be done.
  • No wide moat. Although GoPro has great brand recognition in the United States and is doing well internationally, in China it's rival Xiaomi that may have a leg up. Not only are Xiaomi camcorders significantly less expensive than GoPro's products, but there's that old adage "charity begins at home". There's no guarantee GoPro's Hero series of action cameras will supplant Xiaomi products in Asia.
  • Oversaturation. GoPro has been around for years. Those that want the cameras probably already own them. Although they make for great stocking stuffers, that's a Q4 phenomenon.
  • Smartphone cameras are improving. Although you don't want to take your iPhone or Android device scuba diving, the quality of still and motion pictures on smartphones is improving which may temper sales to mainstream buyers. As an example, the recently released Session model aimed at mainstream users was met with tepid reception, resulting in GoPro reducing the price by $100.
  • Government regulation. Quadcopter is GoPro's foray into the drone market, and is scheduled to be released in the first half of 2016. Wall Street is a forward looking mechanism and potential sales of Quadcopter may be buoying current share price of $28. I think the drone market will be regulated in the near term, and may put pressure on sales, which in turn will decrease earnings.
  • Virtual reality is an evolution, not a revolution. Odyssey, GoPro's 16 camera array that captures action in 360 degrees will surely be a hit, but not until VR technology becomes more suitable for the mass market. As is, we're still in the pioneering phase of VR rollout. Odyssey will not contribute meaningfully to the top or bottom lines for a few years.
  • Analyst downgrades. Piper Jaffray recently cut GoPro's price target from $54 to $25. More brokerage firms may follow suit as the company's financial niche transitions from entertainment entity to hardware manufacturer. Valuation metrics should be in the same ballpark as a Garmin (GRMN) or an Apple (AAPL).

Long Term Bull Thesis

  • Quality. GoPro cameras are the best products on the market. The editing software is improving, too.
  • Brand recognition. GoPro cameras are synonymous with "must have" with the Millennials. This is true both domestically and in Europe. If they command a certain cachet in Asia, this could propel revenues to the upside.
  • Expanding markets. If drone technology doesn't get regulated to extreme levels, and Virtual Reality becomes more user friendly, GoPro will have additional revenue streams to build on.
  • Great distribution. Over 40,000 retail outlets sell GoPro camera. If you want to buy one, there shouldn't be a problem.
  • Well run company. GoPro is profitable and has very little debt.


The sentiment on Wall Street has soured on GoPro because it is no longer considered a media company. Analysts are valuing it as a hardware stock now. Let's compare some statistics between GoPro and Apple, another hardware company and see how it stacks up.

GoPro Apple
Price/Sales 2.23 2.84
Price/Book 4.84 5.08
Return on Equity 41.58% 41.15%
Estimated earnings growth this year 28.80% 41.60%
Trailing P/E 25.53 12.84
Estimated earnings growth next year 15.30% 7.30%
Forward P/E 14.55 11.33
Dividend 0% 1.86%

Source: Yahoo! Finance

The two stocks appear to be evenly matched in Price/Sales, Price/Book and Return on Equity. It's when we get to earnings growth and forward P/E Ratios that GoPro seems to be slightly overvalued compared to Apple. Plus, Apple pays a healthy dividend for a Silicon Valley corporation. I believe Q3 will be a tough one for GoPro, and analyst estimates may come down, especially impacting the forward P/E Ratio.


I'm a value investor by principal and prefer to purchase my stocks at discounted rates. GoPro doesn't meet that criteria yet. All bets will be off if they report a killer quarter on October 28th, but I'm positioning my bid as a price in the low $20 range, below the original IPO price of $24. I will not chase a stock like GoPro. If I do happen to catch my price, I wouldn't hold my position much past Q4 which is traditionally a strong quarter because of the holidays.

Sunday, September 20, 2015

A Clear Plan of Attack

The current market correction we're experiencing has carpet bombed some high flying stocks into submission. Alibaba (BABA), Tableau Software (DATA), and Twitter (TWTR) were all shown the door by short-term investors exiting their positions. Selling pressure has reduced equity valuations to levels that haven't been seen in months, and in some cases years. Although I've done a complete reboot with my investing thesis during the last two years by primarily buying index ETFs, I still dabble in individual equities on a limited basis. Enclosed is my current take on these three securities.

Tableau Software

Tableau Software still remains a category killer. It traded at $131 at the end of July, only to come tumbling down to $82 as of Friday. I got off the sidelines and picked up some shares, although I didn't back up the truck because my belief is that it's much more prudent to be in index funds at this juncture. Nevertheless, I wanted to own a limited number of shares to become an investor in a exciting young company. I thought $82 was a good price for a solid growth company.

My last posting gives you the lowdown on where the company stands, but here's the synopsis - It was a momentum stock for most of 2015, only to be sold off after a very solid quarter because Wall Street deemed the valuation too high. Tableau dropped roughly $50 in 45 days. Some of the depreciation is due to the quarter, some to the overall market correction, and some because on Thursday rival Oracle (ORCL) reported a slowdown in revenues. This, coupled with The Street reconfirming their SELL rating on Tableau citing better valuations among its peers, caused it to drop $6 in one day last week.

This SELL rating by The Street is short sighted in my opinion. Tableau is the proven technology leader in data visualization organizations, whether it's a pure-play, or part of a conglomerate like Oracle. It deserves a premium multiple. Granted, Tableau's technology can be leapfrogged in a heartbeat, but they've maintained pole position for years, and invest heavily in R&D. My bet is that the market sell-off we're experiencing is just a run-of-the-mill correction, and that Tableau accelerates to the upside after the next conference call. It may not become a go-go stock again, but it has the potential to beat the S&P 500 for the next few years.


Last week Twitter CFO Anthony Noto made a presentation at the Deutsche Bank 2015 Technology Brokers Conference. Mr. Noto is a candidate for the vacant CEO position, which is now in a state of flux. Company co-founder Jack Dorsey is Twitter's interim CEO and is also in contention for the top spot. The board has yet to make its decision on who will be calling the shots, and Noto declined to make any comments on the CEO process during the presentation. A lack of a permanent leader has been cited as one of the reasons the stock is under considerable pressure.

Another reason for the equity sell-off is that the product is difficult to use, which in turn decreases the number of monthly active users [MAU]. Mr. Noto addressed this concern and went into detail about Project Lightning, an initiative by the company that is set to launch this Fall. In a nutshell, Project Lightning will curate Twitter content to make Twitter simpler and easier to use. The organization is going to make a big media blitz through television advertising and digital video, to make the mass market aware of the product change.

My belief is that once the market correction is over, the results of the Project Lightning are in, and the CEO is in place, Twitter will make considerable gains. I've written about the stock numerous times, and thought it was expensive. However, I had a limit order in for $25, and during the recent "flash crash" picked up some shares at $23. I really enjoy using the product, and believe the stock will do well after it gets through the near-term growing pains. This is an investment for me, not a trade, albeit a very small investment.


Most people that follow business news are well aware of the pissing match between Barron's and Alibaba last week. It started with Barron's doing a cover story about the Chinese e-commerce company with a preposterous claim that the stock could fall 50%. This is after a fall from $120 to $65. Alibaba shot back with a rebuttal, stating the article was filled with fallacies. It is difficult to know if any company is a house of cards, but if Alibaba is, it would mean the biggest stock collapse since Enron. I give Alibaba the benefit of the doubt, but must play Devil's Advocate because it is a Chinese company which tend to lack transparency.

Like Twitter, Alibaba also presented at the Deutsche Bank 2015 Technology Brokers Conference last week. Executive Vice Chairman Joseph Tsai made the presentation, but didn't shed much more light on the company then what was already given on the last conference call. He did state that there has been a slowdown in the overall Chinese economy since mid Summer, a psychological effect from the stock market crash in China. White-goods such as washing machines and refrigerators remain steady, but the lower end consumer goods have slowed down. He also discussed logistics, and how "the last mile" isn't as developed in his country as opposed to Europe or the United States. This means there's plenty of room for improvement by Alibaba partners engaged in he transport of goods sold.

Alibaba's stock was priced at $68 for its IPO a year ago. It now trades at $65. A lot of smart people in the investment banking business priced it at $65 for a reason - the underlying business fundamentals. That said, although business is improving for Alibaba, the economy is slowing in the People's Republic of China. That, coupled with a large share lock-up expiration that come to fruition on Monday, make me want to take a wait and see on this equity. I don't believe the stock will be cut in half as Barron's suggests, but if it drops $10, to $55, I would consider taking a flier on it for Asian exposure to my portfolio.

Friday, September 11, 2015

Resistance is Futile: Artificial Intelligence Invades the Markets

Black Monday was Monday, October 19, 1987, when the DOW fell 22.61% in one trading session. Illiquidity and investor psychology have been cited as possible factors for the sell-off, but the brunt of the implosion can be traced to Quant Funds that do all of the program trading. We now have circuit breakers and other mechanisms in place on the major exchanges to prevent another catastrophe, or so this is what we're told. Fast-forward to late August 2015, and the DOW drops almost 1,100 points at the open for no apparent reason other than rogue algorithms. Things could have gotten out of hand.

Omega Advisors Chairman Leon Cooperman, a vocal self-made billionaire, is often on CNBC, and he cites the proliferation of risk-parity funds as the culprit of our recent "flash crash". To use a simplistic definition, risk-parity is an investing strategy some quant funds use to limit risk by over-allocating lower volatility assets. This investing technique usually has a heavy dose of bonds over equities, and is supposed to protect investors such as pension funds in all investing environments. In theory, if stocks sell off, you make money with the bonds, and visa versa.

The problem is that both stocks and bonds are not supposed to depreciate at the same time. Enter the new "flash crash" where both stocks and bonds took a beating. A recent Reuters article gives you more depth about risk-parity funds and the possibility that they did do damage to the overall markets three weeks ago. Mr. Cooperman took exception to funds like this in a CNBC interview because they cause instability in the indexes, plus alter conventional investing tactics:

"In the world I grew up in, and the world Warren Buffett grew up in, when something went down you wanted to own more, and in the world that we're in now, it goes up you want to own more, and it goes down you want to own less, and that's just counter-intuitive. It lacks common sense."

He's absolutely right that it doesn't make sense. You've probably heard stock pickers use the expression, "It's a market of stocks, not a stock market.". That's a dead chestnut in today's era of programmatic portfolio allocations. An old stock picker like Cooperman said it almost correctly:

"I think the machines seem to be taking over."

The machines don't seem to be taking over, they have taken over. That's why it's much more advantageous for individual investors to be in S&P 500 index funds such as SPDR S&P 500 ETF Trust (SPY), iShares S&P 500 Index (IVV), or, Vanguard 500 Index Fund (VOO). Any one will do. This is especially true if you are a domestic investor. It's like John Henry versus the steam drill. John Henry and his hammer won, but only to die at the end of the competition from exhaustion. It's much better to be on the mechanized side of the fight at this juncture. Yes, you can still pick winning individual securities, but what's the probability you'll do it consistently when competing against computers.

The Reuters article cites that the world's largest hedge fund Bridgewater Associates, allegedly lost 4.2% in August. Bridgewater's 'All Weather Fund' is an algorithmic trading vehicle, a risk-parity fund. It's supposed to make money during market sell-offs. Because you need to be a high roller to invest in hedge funds, it's the one percenters that lost money during August investing in Bridgewater's fund. Nevertheless, it's Main Street investors, either through pensions, 401K plans or individual broker accounts, that probably saw shades of the 'Great Recession' of 2008-2009 flash before their eyes due to market instability. It was the lead story on the evening news for a week.

Bridgewater Associates has $165 billion in assets under management, and this is miniscule compared to the net worth of the trillions of dollars invested in the overall markets. I doubt they were the lone wolf that caused such a big market meltdown in the most recent 'flash crash', but they could have contributed to it. However, they were asleep at the wheel during August with their proprietary trading algorithms, which presumably were being monitored and adjusted by a team of human beings. What's going to happen when the machines take over, and all trading is guided by artificial intelligence? The future is closer than you think.

"I'd rather be a hammer than a nail"

High finance is quickly morphing into a machine learning world along with the rest of corporate America. Bridgewater Associates recently formed a new artificial intelligence division spearheaded by David Ferrucci, the mastermind behind the IBM and academic engineers that created the Watson computer system. According to an article by Phoebe Venable:

"The AI unit will devise trading algorithms that make market predictions based upon historical data and statistical probabilities — and like all AI systems, it will adapt to new information and get smarter as it goes."

Warren Buffett also likes to say, "If past history was all there was to the game, the richest people would be librarians.". However, Bridgewater isn't alone in its pursuit of unlimited profits by utilizing machine learning. A blog posting by Robust Tech House lists most of the major players venturing into the new era of AI, plus a brief synopsis of their business models. The firms included are:

  • Two Sigma Investments
  • Bridgewater Associates
  • Clonealgo
  • Renaissance Technologies
  • Aidyia
  • Cerebellum Capital
  • Rebellion Research
  • Commeq
  • Castilium
  • Binatix
  • Sinai
  • KLF Capital

If you have plenty of cash to burn, a closer examination of these organizations will give you a nonstop flood of ideas where to invest if you are inclined to go with machine learning algos. The prevailing orthodoxies on Wall Street would tell you to put your money in firms like these. However, I don't know which ones are flush with cash, or which ones are skating on thin ice. With the exception of companies such as Bridgewater Associates, most hedge funds have short self lives, automated or not.

Aidyia, one of the AI Funds listed above, is thoroughly covered in Quartz by Georgia McCafferty. As she states in her posting about the future of finance:

"Most quantitative trading, as it is currently practiced, relies on a human being to develop a mathematical model to identify trading opportunities. The model is then updated by hand to adapt to new markets or changing conditions. For an AI, conversely, humans develops the initial software, but the AI itself develops the model and changes it over time."

Just like the Bridgewater algo. What I find disturbing is that if the people monitoring Bridgewater's 'All Weather Fund' can't keep from losing money in a "heads I win, tails you lose" environment, what's an algorithm going to do if they aren't programmed correctly? This could put a lot of pressure on the markets and cause a collapse. It almost happened three weeks ago with human interaction. What about on autopilot?

I'm not a Luddite, but am wary of the new era. With the proliferation of personal computers and smartphones, the age of privacy is over. This becomes more evident when you mix machine learning with cloud computing. Artificial Intelligence in all forms is here to stay, especially in finance. It's a leading edge business where technology is concerned. There has to be some government intervention to monitor automated hedge funds or else they're doomed to crash the markets.