GoPro Inc (NASDAQ:GPRO) is not going back to its glory days. It is not going to happen. GoPro stock might have had promise once, but the signs are piling up, and they say more disappointment is in store.
There are some GoPro stock longs who still believe there is tremendous upside potential in GPRO. GoPro has gone two years without a new release, and many believe there is pent-up demand for new launches next year.
Furthermore, GoPro has been burning cash like it has no limit, much of which has been allocated to research and development. As a result, GPRO stock enthusiasts think the action camera maker has something “really big” in store for us.
Unfortunately, that seems unlikely. The reality is that you should be scared holding GoPro.
Don’t Bet on GoPro Stock
GoPro operates in a niche market, with camcorders and hopefully drones and VR. The latter is an exciting industry in technology, but also highly competitive.
Meanwhile, camcorders are largely an extinct market. Yes, GoPro found some momentum with its hardware, but the market itself is not large enough to support a multibillion-dollar valuation.
Previously, when GoPro supported a $5 billion-plus market capitalization, much was tied to the prospects of its media channel. This was essentially a YouTube channel. The realization that GPRO does not have a legitimate media channel has been one of the many reasons GoPro stock has been so pressured.
Hardware prices have been slashed. GoPro has no new products in the market. Its media business has been deemed rather worthless.
The effect of these developments include a surge in short interest. More than 31 million of GoPro stock is sold short, or 36% of its total float. When short interest rises like this, it causes — you guessed it — more long-term pressure on the stock.
That Pressure Isn’t Going Anywhere
Last year, I figured that fair value for GoPro’s hardware business was 2x sales. This was based on the price that Apple Inc. (NASDAQ:AAPL) paid for Beats. However, Apple bought a fast-growing Beats with a lot of positive momentum. GoPro lacks growth or positive momentum.
Therefore, “fair value” might be 2x sales for GPRO stock, but that’s only in ideal conditions. With 36% of its float short, Wall Street will no longer give GoPro the benefit of the doubt. GoPro will have to earn everything it gets, and much like other heavily shorted stocks like Fitbit Inc (NYSE:FIT), it can take a while for GoPro to prove its value and force shorts elsewhere.
In retrospect, we have watched Fitbit beat analyst expectations every quarter since going public, and in most instances raise guidance. Yet, its stock remains under pressure, too.
The questions that keep Fitbit stock lower and short interest high are the same that will weigh on GoPro even after launching new products. When a company relies on hardware sales with no actual recurring revenue stream, Wall Street and investors are always looking ahead to what’s next, and are not willing to accept the present as an indication of the future.
There is no better proof than Fitbit.
As a result, GoPro stock owners should notice these facts and move on to better investment opportunities elsewhere.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
