Snapchat acquiring GoPro; a probable investment idea?

Snap Inc is a camera company.

That was the main line that caught everyone’s attention when Snapchat submitted their S1 registration form for their IPO last month. Camera company? Am I missing out on a new product Snap has come up with? Yes, it uses a camera to operate, but their main product is the software technology, the platform; disappearing images and AR filters.

Granted, Snapchat has shipped a hardware which was uncommon and not as mainstream, the Snaptacles I call it, or Snapchat Spectacles. That was the only hardware I can remember from Snapchat. Hence, this leaves us wondering what Snap has instore for the near future.

“Snaptacles”

Lets get down to crux, does a merger of social media platform Snapchat and action camera maker GoPro make business sense? Below are the reasons why Snap would want to buy GoPro.

  1. Besides the hardware expertise and technology GoPro can bring to Snap, GoPro has the branding, and will give any upcoming Snap hardware credibility. GoPro is analogous to super compact and durable action cameras.
  2. GoPro has a cult-like following of videographers and action loving daredevils which would definitely give Snap a tried and tested market when it expands into hardware
  3. It will provide a great stepping stone to launch into hardware. Making high video quality cameras is hard. Shrinking them smaller and making them crash/elements-proof is harder. This will allow Snap to achieve cameras so pervasive in object in our daily lives, that sharing a story would be so seamless and instant.
  4. Expanding content to even wider range of activities. Imagine having a live stream of a daredevil doing a frightening stunt, from a first person POV.

On the other side, these are the reasons why GoPro would favour such a merger.

  1. Hardware sales have slumped as GoPro has yet to expand beyond its niche customer base. New models have not been compelling to spur meaningful upgrades from customers. They are desperately looking to diversify into other areas of business
  2. It ties in with GoPro’s entertainment media aspirations. As a sector, consumer electronics is simultaneously both fickle and intensely competitive. One year’s hot gadget is next year’s Nokia, as consumer preferences evolve rapidly. Most gadgets are rapidly commoditized, which erodes pricing power even if you can maintain unit sales. That’s why GoPro has been talking about becoming a media company for at least two years, almost immediately following its 2014 IPO. It wants to be a storytelling company, with action cameras just a parcel piece in the whole end-to-end storytelling process.
  3. Future is bleak. Financials looks bad. Competitors are abounding, especially Chinese companies like Yi-Technology and DJI. GoPro has loss a big portion of the business to upcoming tech companies which has the ability to produce similar quality products, (or even better), at a much lower price due to leaner manufacturing costs.

In desperate times, any plans for change to improve status quo can sound really enticing.

Striving to be each other

It is worth noting that both companies have tried to be more like the other. GoPro acquired several software startups, including computer vision startup Lumific, video trailer app creator company Stupeflix, and mobile video-editing company Vemory. GoPro has learned that in order to expand beyond its current user base, frictionless video transfer and fast video editing, highlight trailer creation, and instant sharing is a must.

…revealing that Snap is working on developing a drone.

Snapchat has bought Vergence Lab quietly back in early 2014, for $15 million. This was done so stealthy that most of the media overlooked it. This was Snap’s first foray into hardware. Just recently, there was a new report published by The New York Times, revealing that Snap is working on developing a drone, citing three anonymous sources. This is really bizarre news back then, but with disclosure of the company’s declaration as a camera company, it doesn’t sound too far fetched.

Looking at both company’s recent acquisitions and directional moves, it seems very likely a merger would be favorable, in their search for new business frontiers and opportunities.

Investment Opportunity Due Diligence

Before you start buying into GoPro, or getting ready to short Snap’s shares, I would like to walk you through the necessary due diligence, that is to make sure your maximum potential loses would be capped, and you understand the risks involved.

  1. Looking through Snap INC’s books is crucial in determining whether they are in a position to purchase a $1B+ company at this point of time.
  2. Risks involved with hardware. Can Snap succeed in hardware? Materials, distribution, sales and marketing all require significant new investments and, more importantly, a change in strategy.
  3. What is the potential downside of GoPro, if the merger does not materialize in the near future? Given, they have taken huge measures to cut costs and boost sales by their new camera trade-up program. Q4 2016 actual EPS has also beaten analyst’s expected EPS.

World’s leading storytelling company

To be clear, after writing this article, I am less optimistic of the merger, even if it seems like a match made in Silicon Valley heaven. The risks involved, operational complexities, conflicts of interests, risk of venturing into hardware can be greatly punishable. Even if the merger succeeds, it could be a operational disaster and I do not know how things would work out. However, that is the spirit of entrepreneurship, to take calculated risks that the ordinary being would avoid, in the conquest for change and disruption.

All being said, Snapchat has strengths in software and services with its social media platform, while GoPro has strengths in hardware (Karma recall notwithstanding). Together, they could be the world’s leading camera/storytelling company.