For the past seven months, GoPro, Inc. (NASDAQ:GPRO) stock has been the unloved child in the technology sector.
Since last August, GoPro’s stock price has tanked more than 75%. Ouch! However, this new develop is setting GPRO stock up for a massive rally and shares could be on the verge of triple-digit gains.
Let me explain…
Is GPRO Stock on the Verge of a Short Squeeze?
If you need any sign GPRO stock is oversold, take a look at the relative strength index (RSI). The indicator is based on the closing prices of a recent trading period and compares the magnitude of recent gains to recent losses to try to determine whether the stock is overbought or oversold.
The RSI ranges from zero to 100. A stock is considered overbought once the RSI approaches 70 and oversold if the RSI approaches 30. On Wednesday morning, the RSI of GPRO stock is hovering at just above 30, suggesting that GoPro is being oversold.
Chart courtesy of www.StockCharts.com
Short interest on GPRO stock has surged tremendously over the past several months. At the end of July 2015, short interest stood at 9,458,921. By the end of December, short interest on GoPro stock had more than tripled to 32,946,883. (Source: “GoPro Inc. Short Interest,” NASDAQ web site, last accessed January 13, 2016.)
Moreover, the average daily share volume has declined over this period, making days to cover longer and longer. Days to cover is based on the average trading volume and represents the number of days it would take for all short sellers to cover their positions. At the end of July, days to cover for GoPro was as low as 1.00. By the end of December, it would take as many as 5.61 days for all the short sellers of GoPro to cover their positions.
Eventually, short sellers would have to cover their positions. The longer the days to cover, the more difficult it is for short covering. With potential buying pressure at enormous levels from short sellers, GoPro could see a pronounced short squeeze once sentiment starts to change about the company.
But what could spark such a short squeeze?
At this year’s Consumer Electronics Show (CES 2016) held in Las Vegas, GoPro’s founder and CEO, Nick Woodman, announced that YouTube and GoPro will be partnering to bring more 360-degree content to the video platform. Woodman also said that there will be a more affordable version of GoPro’s 360-degree camera, “Odyssey,” which currently costs a steep $15,000. Moreover, the affordable version will also be available to consumers, not just professional content creators. (Source: “CES 2016 Highlights: YouTube Unveils GoPro Partnership for 360-Degree Odyssey VR Camera,” Tech Times, January 9, 2016.)
Joseph Wolf, analyst at Barclays, has found encouraging signs for GoPro at the CES event. He said that the company is deeply involved in two of the “top themes” at this year’s CES—virtual reality and drones. (Source: “Barclays Encouraged by VR Video Showing,” Barron’s, January 11, 2016.)
The Barclays analyst has an “Overweight” rating and a $25.00 price target on the stock. He commented that “Any significant monetization of virtual reality for GPRO is much further in the future but attending CES this year certainly made the opportunity seem much more tangible to us.” (Source: Ibid.)
The Bottom Line on GPRO Stock
With high expectations on its future projects, GoPro should be a hot stock. But the stock’s performance hasn’t really been showing that. In fact, GoPro’s stock is being oversold.
As the great value investor Warren Buffett once said, “Be fearful when others are greedy, and greedy when others are fearful.” With GPRO stock trading at a price-to-earnings multiple of just above 12, there might be some serious value in the action camera maker.