GoPro Inc. (GPRO) jumped by double digits Friday after reporting better-than-expected earnings. GoPro earnings beat on both profits and sales, and GPRO issued strong forward guidance to boot.
Specifically, GoPro Inc. saw Q3 earnings of 12 cents, topping forecasts of 8 cents, and revenue of $280 million, topping forecasts of $266 million. GoPro earnings included Q4 guidance of $550 to $580 million in revenue, topping forecasts of about $500 million by a big margin.
The numbers are undoubtedly a big success, and traders seem enthusiastic.
However, there are serious risks afoot for GoPro stock investors right now. The valuation of this company is simply too stretched, and the looming lockup expiration means bad things for GRPO stock.
GPRO Stock is for Adrenaline Junkies
GoPro has a lot of big fans out there, and for good reason. One recent example of the amazing things you can do with a GoPro camera includes the recent “first-person” view of a lioness running down a kill in South Africa.
But let’s not confuse GoPro products with GPRO stock. Because while the camera-maker clearly has a big following, particularly among the extreme sports crowd, the expectations are simply unrealistically high.
Consider a recent 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.
That means a lot of this short-term momentum is from a short squeeze, and not necessarily Wall Street believing in GoPro Inc. as a viable long position. Besides, it’s worth noting that some of these bears still are sitting on a nice profit even after the post-earnings pop, with GoPro down about 20% from its recent highs.
There’s a good reason for the softness, too. GoPro sports a forward price-to-earnings ratio of almost 80 after today’s pop. 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?
While this most recent earnings report is nice, remember GPRO stock GoPro posted a mere $61 million in total profits last year and struggledafter its Q2 reports because losses were wider than expected. Given that GoPro is growing by going lower price with its cameras, including a new $129 Hero model that’s supposed to appeal to the more casual user, one can expect profit magins to stay challenged going forward and full-year earnings to stay thin.
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, but I expect serious pain in November and December given the decline from recent highs and the looming lockup expiration.
If you own GPRO stock, sell on this pop and don’t look back.
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.
