Can GoPro (GPRO) become more than just a camera company?
That is a question many GoPro stock holders will be asking themselves when GPRO steps into the earnings confessional to release its third-quarter report after the close Thursday.
The manufacturer of highly portable and durable personal HD cameras has taken a hit in investor confidence recently, with market data suggesting slowing imaging and camera sales, and GoPro has a chance to change that bolster confidence this week.
For the record, Wall Street is expecting a profit of 8 cents per share from GPRO, with revenue seen arriving at $265 million. Most analysts, including JPMorgan analyst Paul Coster, believe that the company should beat or exceed third-quarter targets. EarningsWhisper.com even reports a whisper number of 11 cents per share for GoPro.
However, the issue is that GoPro stock trades at about 68 times forward earnings, and the company will have to maintain stellar sales growth outside of the coming holiday season to justify this valuation. One way GPRO can accomplish this, says Wedbush, is for the company to monetize the massive amount of GoPro content being shared online. If the company can transition toward a more media-focused firm, it could bolster a bottom line that could eventually be plagued by tightening hardware margins and an increasingly competitive market environment.
Current sentiment indicators are not holding out hope for any such revelation, however. For instance, Zacks’ analyst data indicates that only three of the 11 brokerage firms following GoPro stock rate the shares a “buy.” Furthermore, the lofty 12-month consensus price target of $90 per share represents a premium of 30% to yesterday’s close, and is ripe for potential target cuts if tomorrow’s report runs afoul Wall Street’s projections.
Options traders are also jumping on the bearish bandwagon for GPRO. Activity in the October/November series of options reveals an elevated put/call open interest ratio of 1.01, with 84,866 call contracts and 85,393 put contracts currently open. What optimism there is for GoPro stock is concentrated in the weekly October series, where this ratio dips to 0.91, while the November put/call open interest ratio balloons to 1.50.
Click to Enlarge Overall, weekly October implieds are pricing in a sizeable potential post earnings move of nearly 12% for GPRO. This places the upper bound at $77.60, while the lower bound lies at $61.40. A rally for GoPro stock would leave the shares well shy of resistance at $80, while a post-earnings drop could threaten support at the $60 level.
2 Options Trades on GPRO Stock
Bear Put Spreads: Those traders looking to side with the bears ahead of GoPro earnings might want to consider a Nov $65/$70 bear put spread. At last check, this spread was offered at $2.94, or $294 per pair of contracts. Breakeven lies at $66.06, while a maximum profit of $2.06, or $206 per pair of contracts, is possible if GoPro stock closes at or below $65 when November options expire.
Straddles: Alternately, traders with a higher risk tolerance might want to take advantage of this high-volatility situation and enter a straddle. A straddle involves the simultaneous purchase of an at-the-money call and an at-the-money put in an attempt to take advantage of a greater-than-expected move from the underlying stock. By employing a straddle on GoPro stock, you are likely betting that the company is going to blow out earnings and offer strong guidance, or confirm the Street’s bearish bias, resulting in a flood of sell-on-the-news activity. At last check, the GoPro weekly Nov $69.50 straddle (which expires on Nov. 8) was offered at $9.80, or $980 per pair of contracts. Breakeven for this trade lies at $79.30 on the upside and at $59.70 on the downside.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
