A year ago, you could rightfully have your head examined for wondering aloud if GoPro (GPRO) stock was actually a value play.
Around that time, GoPro shares would reach their apogee at nearly $100 a pop, as headlines romanticized the action cam firm’s idiomatic market position and explosive revenue growth.
And yes, GoPro was crushing it, with revenues up 38% year-over-year in the most recent public quarter. But should the price of GPRO stock have given the company a valuation of nearly $10 billion?
Most certainly not.
Today, however, GPRO shares are getting the short end of the stick, and trading at just 16 times its forward earnings, with a price/earnings growth ratio of 0.56, shares of the wearable action camera company are majorly oversold. Here’s why:
The Case for GoPro Stock
Certainly, if you’re a momentum investor, GPRO stock doesn’t look too compelling right now, and even some value investors are shunning shares. The stock got hammered in the wider market selloff, and has fallen off a cliff in conjunction with its main chip supplier, Ambarella (AMBA). GoPro stock has been nearly cut in half in the last month-plus; AMBA stock, for its part, is off about 44% from recent highs.
The accelerated slump means that GPRO currently trades below both its 50- and 200-day moving averages, and its Relative Strength Index beneath 25 is a sign of a stock hopelessly out of favor:
Click to EnlargeAmbarella’s most recent quarterly guidance is to blame for much of the recent decline, as the supplier stated that lower-than-expected demand in its wearables endmarket would ding revenue growth in the third quarter. Investors (correctly) read that as a dig on GPRO.
But before getting all doomy-and-gloomy, consider that the disappointing wearable camera revenue is due simply to an acceleration in GoPro’s product cycle; the company released two cameras, the HERO4 Session and HERO+ LCD, in the most recent quarter. Usually GoPro’s releases are more heavily weighted towards the third quarter.
So we have GPRO trading at uber-attractive valuation metrics, an opportunity to take the contrarian view from a technical perspective, and negative sentiment that simply seems to misunderstand why third-quarter revenues won’t be anything special.
In addition to that, analysts at Northland Capital Markets just reitereated an “outperform” rating on GPRO stock, tagging it with a 12-month price target of $80 per share. The rationale? GoPro may in fact be gearing up towards launching its own TV content, and the stock could prove to be a wise investment for the biggest tech company in the world — Apple (AAPL).
While I wouldn’t go into GPRO expecting to see $80 a share in the next year, I think the $50 level is more than achievable before 2017.
Heck, shares were at $64 per share about a month ago. For a company expected to grow revenue at 38% this year, its current forward multiple (which is in-line with the S&P 500 index itself) is simply too attractive to pass up on.
If you can stomach some temporary short-term swings in the name of longer-term profits, it’s tough to find a better play out there than GoPro stock.
As of this writing, John Divine was long AMBA stock and AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
