Beaten-down action camera maker GoPro Inc. (GPRO) will step into the earnings confessional after the close of trading tomorrow afternoon.
The company has caught considerable flack since its last quarterly report, and earnings are expected to fall precipitously year-over-year. That said, there is reason to be bullish heading into GoPro’s earnings report — at least from a contrarian perspective.
Diving into the numbers, Wall Street is projecting breakeven earnings on revenue of $496.1 million. In the same quarter last year, GoPro earned 99 cents per share on revenue of $633.9 million.
GoPro has had trouble with declining sales, specifically with its newest model, the HERO4. However, GoPro has slashed its workforce and lowered prices in order to drum up business and cut costs.
Some analysts believe the moves will be enough to improve GoPro’s results. According to EarningsWhisper.com, GoPro’s fourth-quarter whisper number comes in at two cents per share. Historically, the company has bested Wall Street’s targets in five of the past six reports, with a big miss in the prior quarter sparking the stock’s 83% decline since August.
Despite the decline and sales woes, the brokerage community has a bullish outlook on GPRO stock. Specifically, data from Zacks reveals that GPRO has attracted nine buys, five holds and just two sell ratings. Meanwhile, the 12-month consensus price-target of $13 represents a modest premium of only about 17.5% to yesterday’s close.
The real bearish sentiment levied against GPRO comes from the short-selling community. Currently, some 35.3 million GPRO shares are sold short, representing a whopping 50% of the stock’s total float, or shares available for public trading. This massive short position could be a tinderbox of potential buying power, if GPRO can spook these short sellers into covering their positions.
Signs of concern from short sellers may be emerging in GPRO’s open interest configuration. Currently, the February put/call open interest ratio arrives at a rather bullish 0.67, with calls easily outnumbering puts among near-term options. This ratio rises slightly to 0.78 in the weekly Feb. 5 series, but it is still clear that short sellers may be buying calls as a way to hedge against a GPRO earnings rally.
Overall, weekly Feb. 5 series implieds are pricing in a potential post-earnings move of about 16%. Based on Monday’s closing price, this places the upper bound at $12.82, while the lower bound lies at $9.30.
A breach of $10 would be a confirmation of GPRO stock’s recent downtrend, and the stock could sink even deeper into single-digit territory as a result. A rebound could put a solid floor under the shares, but $20 still looms large as overhead resistance.
2 Trades for GPRO Stock
Call Spread: While bearish sentiment on an underperforming stock is par for the course, GPRO has shown signs of life recently. The stock wants to rebound from its current oversold levels, it just needs the right spark — and tomorrow night’s report could be just the thing to unwind a wealth of pent-up bearish sentiment.
Along those lines, the February $11/$12 bull call spread has plenty of potential. At last check, this spread was offered at 33 cents, or $33 per pair of contracts. Breakeven lies at $11.33, while a maximum profit of 67 cents, or $67 per pair of contracts, is possible if GPRO stock closes at or above $12 when February options expire.
Put Spread: On the other hand, GoPro still faces quite a few hurdles, not the least of which is improving sales going forward and breaking out of the “action camera” mold. Traders siding with the bears might want to consider a February $9.50/$10.50 bear put spread. At last check, this spread was offered at 42 cents, or $42 per pair of contracts. Breakeven lies at $10.08, while a maximum profit of 58 cents, or $58 per pair of contracts, is possible if GPRO closes at or below $9.5 when February options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
