Unless you have a serious dandruff problem, a head-and-shoulders pattern is the last thing you want to see. The bearish technical formation usually indicates a concentrated effort by long-side investors to push forward against tough, upside resistance. Initial success, though, is more often than not met with crushing disappointment. But what you really want to avoid is a bearish harbinger before an important event — say, an earnings report. Sadly, that’s the position GoPro Inc (NASDAQ:GPRO) finds itself in.
GoPro stock is set to release its third quarter of fiscal year 2016 report after the closing bell on Thursday. This, out of all the other reports we got from GPRO, might be a doozy. To say that the markets are giving a vote of no confidence would be a grievous understatement.
Aside from a speculative burst of momentum in mid-September, GoPro stock has been charting a decisively bearish trend channel over the past two-and-a-half months. Most notably — and this is a point I’ll revisit shortly — GPRO stock is down 13% over the trailing five days.
You certainly can’t blame Wall Street for passing on the action camera maker. Whether you’re a technical or fundamental investor, GoPro stock isn’t giving you a lot of good reads. Sure, the balance sheet overall is very stable, with a lack of debt being a particular highlight. But even there, the rise in inventory levels isn’t encouraging, especially with the new Hero5 model recently hitting store shelves.
GPRO’s Hero5 Isn’t Much of a Hero
Indeed, the Hero5 is illustrative of the fundamental challenges facing GoPro stock. On the plus side, GPRO is sticking with what works — a clean, no-fuss design with updated technological features. Also, the Hero5 Black — the premium level action cam — features significantly advanced optics.
On the other hand, it’s easy for GPRO stock competitors like Sony Corp (ADR) (NYSE:SNE) and Panasonic Corporation (ADR) (OTCMKTS:PCRFY) to say, “big whoop!” Investors should be careful not to dismiss the challengers as aging has-beens. Because of their diversified businesses, they can pump out different pricing and product offerings with a relatively small investment. For example, the Panasonic HX-A1 is a nifty alternative to the Hero5.
Don’t get me wrong — GoPro stock wins on marketing and branding all day long. But the Hero5 isn’t that much different from the competition. Also, I question the move to encase both the premium and starter model in a waterproof chassis. You’re limiting differentiation. In an environment where retail is hurting, people are more likely to choose the cheaper Hero5. This then hurts margins for GPRO — something that’s been a big problem recently.
No Confidence for GPRO Stock
It all adds up to one thing — investors don’t like what they’re seeing, and they’re cutting their losses. I’m very concerned about GPRO’s upcoming Q3 report because the markets have been almost dead-on with their votes.
For GoPro’s first five earnings reports, the action-cam maker handily beat profitability expectations. The average earnings surprise was 38%. In addition, technical sentiment — with the exception of Q3 FY2014 — was very positive heading into the report date. On average, the trailing five-day performance of GPRO stock was 2% on the eve of earnings day.
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This optimism took a radical shift, however, in the last four quarters. A meeting of expectations in Q4 FY2015 was sandwiched by misses — one before, one after.
Of those three earnings reports, the trailing five-day performance of GoPro stock averaged a loss of 6%. The most recent release in Q2 was a solid beat with an 11% positive surprise.
Sure enough, the markets predicted this one, as technical sentiment was bullish heading into the release.
GoPro Stock: Don’t Look for Miracles
Recall that I said GPRO stock is down double-digits over the trailing week-long period. There has only been one time in the company’s history where the actual earnings result reversed the implication of declining prices.
Even there, GoPro stock was in its infancy, and was naturally subject to volatility. I have a hard time believing that it’ll pull a rabbit out of the hat come Thursday.
Stranger things have happened so investors need to keep a close eye no matter what. But from a bigger picture standpoint, GPRO stock is too much of a risk. Retail sentiment is pressured, competition for the Hero5 is fierce, and financial performance has been lacking. A miracle on the Nasdaq might occur for GPRO, but very few are waiting for it.
As of this writing, Josh Enomoto is long SNE.
