Exactly one week ago, I wrote about how Morgan Stanley suddenly and dramatically reduced its price target on GoPro Inc (GPRO) stock from $62 to $35. I wrote about how absurd and reactionary the overnight pessimism had been, and how flawed the logic was behind the new price target.
Another Wednesday, another day I’m going in on analysts all over again.
That’s because the simple folks over at Piper Jaffray decided to shun history. The firm instead opted to “follow the leader,” and slash its own GPRO price target by 54%, from $54 per share to a mere $25 per share.
It downgraded GoPro stock from “overweight” to “neutral,” despite the fact that at yesterday’s closing price of $27.97, its price target implied downside of more than 10%. If that’s “neutral,” I’d hate to see what “underweight” implies.
Why You Should Ignore Piper on GPRO
While last week’s Morgan Stanley price slash was idiotic enough, at least the firm’s thesis boiled down to a semi-coherent point: The latest GPRO release, the Hero4 Session, was not an instant hit, forcing GoPro to lower its price point from $399 to $299 per camera.
Shortsighted? Yes. Blind to the rest of the GPRO product lines? Absolutely. But it doesn’t hold a candle to the reason Piper Jaffray cited in its downgrade today:
“GoPro shares have been on a roller coaster since April with price action more than reversing from the up 46% gain through early August followed by a 56% correction, [so] we are stepping to the sidelines as we expect near-term volatility to prevail.”
A Wall Street research firm, a company that does this sort of thing for a living, just told us that they downgraded GPRO stock merely because it is volatile.
Excuse me, I just threw up in my mouth a little bit.
Yes, Jaffray also cited a downtrend in GoPro’s rankings on Amazon (AMZN), which have been downtrending since May. Of course, apart from the Hero4 Session’s July release, there’s no compelling reason GoPros should sell faster during the summer anyway.
Not to mention the fact that GPRO revenue doesn’t depend squarely on its Amazon rankings, and revenue last quarter was up a whopping 72%.
Piper Jaffray also trimmed its earnings per share estimates for 2015 and 2016, and lowered the multiple it felt GPRO stock commanded from 28 to 15 times GoPro’s earnings. This multiple reduction is where much of the “justification” for today’s price slash came from.
I’ll be clear: A multiple of 28 times earnings is too high for GPRO stock. But a multiple of 15 is far too low. The S&P 500 currently trades at 21 times earnings. GoPro is growing far more rapidly than the average stock in the S&P 500, but for the sake of being conservative, let’s assume it deserves a multiple of 21.
If Wall Street’s 2016 EPS estimates are accurate, GPRO will earn $1.98 next year. Piper’s new expectation is for 2016 EPS of $1.64. Let’s do some simple math:
- $1.98 x 21 = $41.58 at the end of 2016. Upside (from yesterday’s close): 48.7%
- $1.64 x 21 = $34.44 at the end of 2016. Upside: 23.1%.
Neither of these seem like particularly neutral scenarios.
Sometimes Wall Street analysts can offer important insights. Sometimes they shine light on a previously unknown problem or opportunity. And sometimes, they’re just a bunch of noise.
Tune out Piper Jaffray’s GPRO call; in fact, with shares trading more than 2% lower Wednesday after the downgrade, GoPro stock is a steal.