Out of Touch With Reality

There was a new IPO a bit over a week ago which made some headlines, and that has me scratching my head yet again about how out of touch from reality the stock market seems to be. Indeed it seems each day brings further proof that the stock market is not driven by actual economic facts but it is purely driven by emotions as well as an inherent hunger to make lots of money quickly. As always, most people will not complain because they have made a quick buck, but it is truly my opinion that this sort of financial behavior does considerably more damage in the long-run, and ultimately continuous to hinder the global economy from really moving on from the crisis.

Obviously the IPO I am speaking about is GoPro. To set the record straight, I really like their product and think they fully deserve their success until now, and I hope they will continue to be successful in the future. I have been blown away by the performance of the little GoPro video cameras. They produce films of incredible quality, are exceedingly easy to operate, and have managed to change the way action sports are filmed by amateurs. They have succeeded in placing their name to the extent that any small action camera is referred to as a GoPro, in the same way as Sony did with the Walkman all those years ago. Just like in the early years of the Walkman, nobody else has managed to produce a similar product that comes close in performance which says a lot about how accomplished the GoPro camera actually is. They totally deserve their market leader position, even if they will likely struggle a bit to maintain this position in the coming years as competitors catch up.

So, if I am so enthusiastic about the GoPro, then why all the gloom and doom about the IPO? Well, simply put because the size of the IPO has been totally blown out of proportion yet again. Looking at the basic figures, with the IPO price of $24 the market capitalization of GoPro comes to something like $ 3 billion. This is for a company that essentially only has one product (yes there are three different types of GoPros available, but they are essentially the same product). Compare this to a company like Nikon which has been around for a long time producing some very high quality cameras and lenses, which has a market capitalization of $ 6.3 billion, or roughly double that of GoPro. To me, this simply does not make any sort of economic sense.

Several analysts are commenting that much of the value of GoPro is a result of the potential they have in producing content for YouTube, and consequently Facebook as well. As always, this is pure speculation of something which doesn’t exist. There is absolutely no solid economical basis for this estimate, and so yet again serves to artificially over-inflate the stock price. I simply can’t figure out how realistically economists can set the IPO price for GoPro at $24, and then see it surge past $30 on its first day. I know a couple of people would not have made as many millions out the deal, but it is my opinion that an IPO price of $12 would have been much more appropriate to the actual value of the company at this point in time, and would have served to not over-inflate market speculation yet again.

Three days after the IPO the stock went above $48. Apart from being an increase of 100%, it actually implies that GoPro has a market capitalization equivalent to that of Nikon! I believe it may be time for a reality check at this point, and even if the price of the stock is off its peak, it is still hovering in the $40 area. What annoys me the most though is that GoPro, like Tesla, are stocks I would actually like to own because I truly believe they produce valid products. Unfortunately it is my opinion that their stock prices are completely out of touch with reality.