Crumbs & GoPro: Malinvestment x 2, But Blame Short Sellers. Booyah!

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Forbes on the crumbling of Crumbs (bold emphasis mine):

Back in July 2011, Crumbs went public in a reverse merger at just over $13 per share. At approximately $60 million market cap, Crumbs wasn’t huge, but that was a hefty price given the chain only had about 35 stores.

Trouble came just about a month after it went public, when the company reported that same store sales were down 6%. By September 2011, Crumbs stock had fallen over 70%to under $4 per share. That November, the Crumbs CEO resigned. Despite growing to a peak of 70 locations, the overall financial performance has been in steady decline ever since.

Crumbs’ quick failure stands as a warning for investors of “trendy” new IPOs — especially for companies overly reliant on a single hit product.

So the IPO that Wall Street waxed endlessly about was doomed from the get-go. This IPO was not doomed because it was “trendy” and based on a single product – it was doomed because the easy-credit economic boom enabled manufacturers to invest in and produce increasingly more extravagant products and services that lured consumers who were not restricted by cash on hand or real wealth. Consumers could spend as they pleased through the careless use of government-subsidized cheap debt. Hence came the $5+ cupcake. I am always amused – perhaps too easily – by Wall Street’s high-toned pontification on these matters. From a 2011 article in The Street:

A publicly traded Crumbs “will be a growth play” for investors, Michael A. Yoshikami, president and chief investment strategist at YCMNET Advisors, told TheStreet in January when reports of a Crumbs IPO first surfaced. He expects investor interest to be strong since Crumbs would represent one of the only ways to bet on the cupcake trend through an exchange-traded equity.

The ‘cash is trash’ mentality ignores that long-term cash flow is necessary to sustain the business so that revenues can be earned and profits can be made. In the Wall Street world, trendy and fashionable = an investment banking firm’s wet dream. And so these disatrous IPOs commence. See my article from today on Crumbs and the end of the cupcake bubble.

Another recent and highly-praised IPO that is going to go bust is the GoPro, a camera company that is mostly riding the tide of the Narcissistic generation’s expression of self-love through endless video selfies. (Look at me! here I am! Here I was! There I go! Booyah!) After the IPO, GoPro shares quickly immediately rose 100% from $24/share to $48/share.

The stock’s torrid climb has more than doubled GoPro founder and CEO Nick Woodman’s net worth. Woodman (and his wife Jill) sold about 3.6 million shares in the IPO, netting a pretax windfall of $86 million. But he still owns over 52 million Class B shares, representing a stake of 48%.

Woodman’s shares were worth just over $1.2 billion at the IPO price, but they’re now worth over $2.5 billion (up nearly $500 million just from yesterday). Including cash and other assets, Forbes estimates Woodman’s current total net worth is approaching $3 billion.

Not that GoPro isn’t a cool and innovative product in some respects, but the same thing was said about Skullcandy when Wall Street poets talked up that IPO game. Skullcandy has since taken a nosedive into the bottomless pit of once-celebrated IPO carnage. Wall Street bobbleheads are now blaming the short sellers entering the market for GoPro’s volatility in price. The conventional minds of Wall Street always have it backwards: instead of short selling being the driver in downward stock price movement, the shorties are cutting loose on GoPro because they understand the malinvestment factor of fashion-forward products that quickly lose their appeal once the the infatuation and novelty is over. GoPro will GoToTheGraveyard.

3:21 pm on July 8, 2014
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