GoPro Inc (GPRO) stock is in a bad, bad way right now. Shares of the wearable action camera company are down 75% in the past year and 62% in the past three months.
A 62% loss … as the S&P 500 gained 1%? Is GPRO going insolvent or something?
No, far from it. It has a whopping $513 million in cash and short-term investment on its books, as of September 30. That amounts to $3.73 per share — not a huge amount given the fact GPRO stock trades around $20 per share.
But GPRO has no long-term debt, so $513 million can go a long way for a $2.76 billion company.
So, it clearly wasn’t liquidity concerns behind the precipitous selloff. And considering revenue jumped 43% in the third quarter (and earnings surged 108%), it doesn’t look like a growth problem either.
The doomed trifecta of reasons that sent GPRO stock stumbling were actually short sellers, a flurry of analyst downgrades, and what technically amounted to an earnings miss despite the spectacular raw growth metrics.
GPRO’s Trifecta of Doom
Short sellers have contributed heavily to GPRO’s recent slump. At the end of July, 9.4 million shares were being sold short. The “days to cover” ratio, which measures how long it would take for all shorts to unwind their bearish bets given average volume, sat at one day.
Three months later, there were more than three times as many shares being shorted: 33 million. The “days to cover” ratio sat at 2.86.
A number of analysts also hopped on the bandwagon with fresh doses of GPRO hate. Morgan Stanley and Piper Jaffray both came out with poorly reasoned downgrades, issued before GoPro even reported third-quarter earnings.
Then came earnings, and those sent GPRO stock plunging 13% in a single day, merely because Wall Street set the expectations too high to begin with.
Thankfully for opportunistic/contrarian/value investors, the recent tumultuous slide creates a great buying opportunity. Looking at its technicals, GPRO stock is trading on the cheap, with an RSI of 26 (an RSI of 30 or below usually means a stock is oversold.)
Plus, you may or may not have noticed that we’re about to hit the holiday season, so expect GoPros to start flying off shelves, especially with the company’s renewed commitment to marketing.
But the main reason the 3-month, 62% meltdown represents a compelling buying opportunity is simply GPRO’s incredible valuation right now. Shares trade for 16 times earnings, 14 times forward earnings, and a PEG ratio of 0.7.
To put things in perspective, the S&P currently trades for about 22 times earnings and 17 times forward earnings. And a PEG ratio of 1 is considered a major steal. PEG ratios of 0.7 just don’t come around every day.
And neither do GoPros. The market will figure out its folly eventually … but those who figure it out the quickest make the most money!
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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