GoPro Inc (GPRO) stock is up an incredible 24% over the last three weeks, but that doesn’t mean this pricey momentum stock has its mojo back. Indeed, if anything, the red-hot run only adds to the risk of investors buying high.
In addition to a frothy valuation — GPRO goes for 53 times forward earnings — and some pretty wide price swings in its short life, GoPro carries the very serious risk of being first. Not to sound all pretentious and philosophical, but in many ways, the greatest risk for GoPro stock is existential.
After all, as soon as a company like GPRO establishes that there’s a market for some new service or product, it seems like everyone and his brother wants a part of it. Nimble startups with improvements on the original design attack from below, while larger companies with greater resources assault from above.
Indeed, there’s seemingly no end to new companies looking to knock a founder of its perch. Among the latest GPRO rivals is a French firm making an action camera that takes high-definition video with 360-degree views.
Years later, when the market has stabilized and reached some kind of equilibrium among surviving players, it’s pretty rare that the company that originated the whole thing finds itself on top.
Google Inc (GOOG) didn’t invent search, Facebook Inc (FB) didn’t invent social networking and — going much farther back — Boeing Co (BA) didn’t invent airplanes. As big as the market for GoPro gear might be, there’s no guarantee that GPRO will still dominate it a few years from now.
GoPro Stock Offers No Moat
At the very least, over the longer term, there are legitimate concerns over growth prospects for GoPro. It’s not clear how large a market there is for small, mountable, shock-resistant video cameras — and, as mentioned, nothing to prevent competitors from making a cheaper alternative.
Since going public in June at $24 a share, GoPro stock has more than doubled, currently fetching more than $67, but it’s still a momentum stock very much in danger of losing its mojo. GoPro stock topped $90 three months ago, and since then its been steep and fast ride down. Even after it’s recent holiday run, GoPro stock is off about 30% from its all-time high.
True, you could argue that GPRO’s forward price-to-earnings multiple is justified by the company’s long-term growth forecast of 35%. That’s a five-year outlook, however, and it’s not clear GoPro will still own the segment three years from now, much less five. We’ll say it again: GoPro’s moat — its barriers to entry — just isn’t all that deep or wide.
Cool gadgets have a way getting buried. Just ask Sony Corp (ADR) (SNE), inventor of the Walkman, Betamax and MiniDisc. That’s why, if anything, the market should give a one-trick pony like GoPro a risk-haircut to its multiple. Call it an existential discount.
But that’s not how hot momentum stocks work. Valuation doesn’t mean much at this stage in GPRO’s life. It trades on growth and hype — and that means GoPro stock has no place in any value investor’s portfolio.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
