No doubt, things have been bad for GoPro Inc (NASDAQ:GPRO) stock investors since last summer. But the worst might be over for this unloved child in the stock market. Since dipping below the $10.00 mark on February 4, GoPro stock has climbed more than 26.8%.
Going forward, there are quite a few catalysts that could keep the upward trend going in GPRO stock. Let me explain.
Short Squeeze Could Lead to Big Returns
When a stock that was going downhill suddenly changes direction, short sellers might get worried. And that’s the case for GoPro right now.
You see, at the end of last July, short interest for GPRO stock stood at 9,458,921. Six months later, GoPro’s short interest has more than tripled to 33,776,857. (Source: “GoPro Inc. Short Interest,” NASDAQ web site, last accessed February 19, 2016.)
Short sellers hope that the stock will go down, so they can buy it back at a lower price than what they sold it for. But when the stock is going up, short sellers are losing money.
While short interest has surged, average daily volume has actually declined. This means days to cover have got a lot longer. Days to cover represents the number of days it would take for all short sellers to cover their positions. At the end of July, it would take just one day. By the end of January, it would take more than five days for all the short sellers of GoPro to cover their positions.
What this suggests is that short covering is becoming more and more difficult in GPRO stock. But short sellers would eventually have to buy back the shares they shorted. And when a stock is trending up like what GoPro is doing right now, the short squeeze could be more pronounced.
GoPro’s founder and CEO, Nick Woodman, has always been blunt when it comes to pointing out where the company needs to improve. And that might not be a bad thing.
Looking at GoPro’s performance in 2015, he remarked that “growth slowed in the second half of the year and we recognize the need to develop software solutions that make it easier for our customers to offload, access and edit their GoPro content.” (Source: “GoPro Announces Fourth Quarter and Full Year 2015 Results,” GoPro Inc, February 3, 2016.)
Woodman was referring to the lack of an ecosystem for GoPro’s products. No doubt, GoPro cameras are high-quality and easy to use. However, after shooting a video, users often have to back up their files and edit them. On that front, GoPro needs to make the process easier.
Luckily, in just a few days after Woodman pointed out the issue, the company was already making progress addressing it. On February 5, Microsoft Corporation (NASDAQ:MSFT) announced that it had entered into a collaborative patent licensing agreement with GoPro. (Source: “GoPro and Microsoft Sign Licensing Agreement,” Microsoft Corporation, February 5, 2016.)
The announcement did not reveal the specific terms of the agreement, but it did say that the agreement was for “certain file storage and other system technologies.” This means GoPro could soon start using Microsoft’s cloud service and other software solutions.
It’s too early to say what kind of solutions GoPro users would eventually get. But it would definitely make file backup and editing easier than what’s currently offered.
This agreement also reflects GoPro’s willingness to improve its appeal. If the company manages to build an ecosystem complementing its hardware device offerings, it could drive more consumers to the brand.
The Bottom Line on GPRO Stock
Of course, developments like building an ecosystem for content creators will take time. But with such a high short interest, if any good news on GoPro were to hit the market, we could see another double-digit climb in GPRO stock.