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GoPro (GPRO) Lowballs Secondary Offering at $75, Stock Craters

TSLA has had a few secondary stock offerings, although likely for different reasons than GPRO

GoPro Inc (GPRO) stock, which went public to much fanfare at $24 per share back in June, is ready to repeat the process. You can’t blame the company and its early investors for wanting to take advantage of what’s happened to the GPRO stock price since then: Shares traded as high as $85 a pop just yesterday, and even briefly flirted with the $100 per share level in recent months.

gopro inc gpro stock lowballs secondary offering stock cratersSo GoPro investors were underwhelmed when the wildly popular San Mateo, California-based wearable camera-maker said it would price a secondary offering of GPRO stock at $75 per share.

The GoPro stock price tumbled immediately in response to the announcement, losing more than 5% overnight to trade right around the $75 per share level.

Does GoPro Think Its Stock Is Overvalued?

Two days ago, GPRO stock shot higher after announcing that it would have a secondary offering. The reaction was a bit of a head-scratcher, since the new offering would end up diluting GPRO stock. Shares of Ambarella Inc (AMBA), the versatile chipmaker that supplies GoPro the low-power, high efficiency chips behind the company’s popular cameras, also rose sharply on Tuesday for reasons that are not entirely clear.

So what does the offering mean for GPRO investors? Does GPRO think its stock is overvalued?

The company’s $75 price tag certainly implies that GoPro thinks that price is all the market can bear. GoPro investors should keep a few things in mind when they mull the meaning of this secondary offering:

The company is using the recent run up in the price of GPRO stock to raise more capital: The 10.4 million share offering will only consist of 1.3 million shares that GoPro itself owns. At $75, the secondary offering will essentially serve as a near-$100 million cash infusion. The company intends to use the money for “general corporate purposes, including working capital.”

GoPro insiders are also using the opportunity to make some money: This seems to be the main reason for the offering, whether that’s being explicitly stated or not. The remaining 9.1 million of the 10.4 million share offering will be unloaded by insiders, including GoPro CEO and founder Nick Woodman, who will sell 4.1 million shares in the offering.

In short, I see this offering as a conspicuous way for insiders to cash out. It’s not like GoPro feverishly needs the money for infrastructure like Tesla Motors Inc (TSLA) did when it had a secondary offering last year. TSLA, after all, has global ambitions, and it ain’t cheap to make and market electric cars worldwide or build the biggest lithium ion battery factory on the planet.

Plus, it’s the worst-kept secret on Wall Street that GoPro founder Nick Woodman wants to sell some of his GPRO shares. In October, his decision to set up a charitable trust — replete with no mission statement — before the lockup period caused some shareholder outrage and began GPRO stock’s fall from grace.

This shouldn’t be ruinous for the GPRO stock price; I expect GoPro products to be hot commodities this holiday season, so it’s tough to pan the stock.  But it certainly isn’t bullish, either. I’d wait for the stock price to settle into a comfortable range before rushing to any decision here.

As of this writing John Divine was long Jan 2015 AMBA $20 calls and Jan 2016 AMBA $25 calls. You can follow him on Twitter at @divinebizkid.

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