GoPro (GPRO) stock is admittedly up strongly since its recent IPO. Specifically, GRPO stock has soared almost 180% since its initial public offering in June.
But there are signs of trouble afoot for GPRO stock.
First, Nicholas Woodman and his wife Jill have found a loophole in the lockup on their GoPro shares and will be gifting some GRPO stock to a charitable trust. Normally, they would have had to wait until Dec. 26 to trade shares — 180 days after the company’s IPO.
Next, there’s a Wall Street Journal report that reveals short sellers are willing to pay enormous premiums to borrow GRPO stock — all to sell it short and hope for a big profit when the stock craters.
Lastly, as InvestorPlace technical analyst Serge Berger recently noted, a bullish flag pattern resolved with a strong finish at the end of the month … and with the stock well above its 20- and 50-day averages and with an overbought RSI, the charts are pointing to a technical breakdown.
And we haven’t even gotten into the long-term challenges of valuation and fundamentals for GPRO stock yet!
GoPro Going Down — The Bear Case for GPRO Stock
I recently highlighted 7 reasons to sell GoPro on MarketWatch last week … but in case you missed it, here’s the Reader’s Digest version of why shorting GPRO stock is such a fashionable trade right now:
Valuation: No company can support a forward price-to-earnings ratio of 90 forever. And given the fact that GoPro is still just a camera company at heart, why is the market valuing GPRO at such a huge multiple?
Strategy: At IPO, GoPro pitched itself as a media company, with plans to create a network for videos shot on its performance cameras. But anyone who has followed digital media knows that web-based advertising is a deflationary market. That means that even if GoPro does launch a successful media site from a user perspective, it still could fail to see any substantial profits from this enterprise.
Profitability Struggles: Speaking of profits, remember GPRO stock has earnings that are super small. Last year, for example, GoPro posted a mere $61 million in total profits last year on a current valuation of $11.4 billion! GoPro has operated at a loss in five of the past eight quarters, and in its July earnings report posted a GAAP loss of 24 cents per share.
Margin Pressure: Amid its current lack of profits and big challenge of building a successful media business, GPRO is also going downmarket with its new $129 Hero model that’s supposed to appeal to the more casual user. Competition from other cameras and the need to grow by going down-market has forced GoPro into the low-priced category that is naturally lower margin. With a plush 42.1% margin last quarter, it’s likely we’ll see declines in profitability sooner rather than later.
Accounting is Amiss: You might be wondering why I just said GoPro was unprofitable when many reports claimed it posted 8 cents of earnings per share last quarter. Well, that’s because GoPro is just another high-growth tech company that thinks it can get away with its own bookkeeping methods to dress things up instead of following generally accepted accounting practices. GAAP numbers can’t be discounted, especially since, unlike a fashionable cloud-computing company, GoPro is basically a consumer-electronics company. I don’t like that some Silicon Valley firms use non-GAAP numbers, but I can at least understand it when your value is derived from “users” and lines of code. But GoPro? Sorry, you don’t get to use your own accounting practices when you’re selling what amounts to an updated camcorder.
All this, amid a looming lockup expiration of Dec. 26 for GoPro stock — and with a mammoth gain since IPO, you can be sure a lot of shareholders and early investors are looking to cash out.
Remember, on the first day after Twitter (TWTR) investors were allowed to cash out their shares, it plunged to an all-time low as stockholders bailed out.
GoPro might not show signs of distress immediately, especially because it’s such a sentiment-driven company. And even if it did, I almost never advise short-selling a stock because of the risks.
I am, however, interested in the GPRO puts with January expiration. Given the potential of another weak profit report in November and the weight of lockup expiration in late December, there could be some big volatility in the months ahead for this company.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
