Action-camera maker GoPro (NASDAQ:GPRO) bounced as high as 22% on Friday before settling to a 10% gain. GPRO stock is still sitting in the red since the start of the year, however — and is deep in the red since its high several years ago. In 2014, GPRO nearly hit $90, but is now worth single digits.
The catalyst for the recent pop? Better-than-expected second-quarter earnings and an apparent soon-to-come return to profitability. The company’s CEO and co-founder Nick Woodman said:
“We are on track; sell-through is solid in all regions indicating strong demand, and we believe GoPro will be profitable in the second half of 2018. Our plan is to exit the year with an improved margin profile we believe translates into a profitable 2019.”
Why GPRO Stock Popped
According to MarketWatch, the gains late last week represented the stock’s best single-day percentage in a year. A profitable 2019, though, doesn’t necessarily mean GoPro stock is going to be a profitable investment at this stage in the game. Instead, I think it’s safe to say that last week’s pop was a dead-cat bounce, fueled in part by short sellers covering their positions. Things have gotten so bad, GPRO stock has a short ratio of 7.46, with 22% of the company’s shares sold short.
Put another way, a better-than-expected quarter from an underperforming company is far less impressive than the stock’s recent returns suggest. The company’s revenue dropped 5% year-over-year during the quarter, while inventory — an important indicator for the company — decreased by $47 million from the prior quarter, marking the company’s lowest level since 2014.
Also, during the earnings call, the company expressed that a shortage of resistors and capacitors could mean GoPro can’t meet the demand for its new offerings in the ever-important holiday season.
“GoPro said that due to the dynamic supply situation, sales in the second half of 2018 may fluctuate depending on the timing of the supply,” another MarketWatch piece said.
A quick glance at forward-looking numbers is a quick reminder of just how low the bar has been set for GPRO. The current year is supposed to end 33 cents in the red, while sales are expected to drop 3%.
Meanwhile,the competition is heating up. Smartphones like the Alphabet’s (NASDAQ:GOOGL) Google Pixel are increasing their photo quality while companies like SJCAM, Samsung and others are bringing direct GoPro competitors into the market.
GoPro will likely have some other pops, but timing these is a fool’s errand. And they aren’t a reflection of any kind of bull case for the company, especially when you factor in short-selling’s role. There’s simply no fundamental base for the company, as a quick glance at any longer-time-frame chart or the company’s estimates reminds us.
It’s only logical for management to express optimism about the company’s profitability — but that optimism could also set investors up for disappointment, which GPRO is very good at delivering.
The Bottom Line for GoPro
Steer clear of GoPro. Nothing in this stock’s story has actually changed.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.