Now Is Not the Time to Bet Against GPRO Stock
GoPro, Inc. (NASDAQ:GPRO) stock has had a volatile year, with spectacular highs and dismal lows. But the recent downward swing in GoPro’s stock price has little to do with fundamentals and everything to do with incorrect market psychology. The factors that markets had ignored this year are now likely to give GPRO stock uplift into the next year.
But before getting into that, let’s backtrack a little and analyze just how GoPro stock got to where it is today, trading in the $27.00 range.
Is GoPro Stock Trading on Facts or Psychology?
Economic fundamentals had little to do with GPRO skyrocketing to $92.00 per share; they have even less to do with the stock’s current low point. Keep in mind that this stock market rollercoaster has all occurred in less than 12 months.
Near its peak, GoPro stock boasted a price-to-earnings (PE) ratio of more than 85.0, as well as a price-to-share ratio of nine. Despite GoPro being one of the hot stocks being driven up by sheer industry momentum, at some point, you do have to take fundamentals into account. The tipping point usually comes at a time when market sentiment regarding the stock turns so negative that fundamentals take hold of stock price movement.
If you still have faith in market analysts’ ability to correctly forecast which way GoPro stock will be heading, then think again. Had you listened to what they were saying about the company’s price targets at the end of 2014, you would have lost roughly half your investment by today. (Source: “Analysts bullish on GoPro Inc,” Financial Post, July 21, 2014.)
Market analysts gushing about the sky-high upside potential of GoPro stock were everywhere back then, as the durable camera bandwagon began to pick up heat and push GPRO stock upward. Market sentiments in this period were so bullish that most analysts maintained price targets in the $70.00–$94.00 range, as there was widespread confidence in GoPro’s ability to dominate its market segment. (Source: “This Is GoPro’s Plan to Continue Conquering the World,” Time, July 14, 2014.)
But the GoPro stock price has tanked by more than 50% since this time last year. As expected, we have a tidal wave of analysts pushing out bearish reports and downgrading their price targets. Both Morgan Stanley and Barron’s have both published negative views on the stock, and more big names are following suit. (Source: “Here’s why GoPro’s stock is dropping so much,” Fortune, October 10, 2015.)
Chart courtesy of www.StockCharts.com
But of what value is a bearish stock analysis when the share price has already lost half its value? The only thing these market analysts are doing is aligning themselves with the overall market sentiment, giving little real direction to prospective investors.
Has GoPro Stock Finally Hit Bottom?
To answer this question, it’s important to take a sober look at cold, hard fundamentals. For a company that at first glance appears to be crashing and burning, the financials might surprise you.
GoPro’s revenue was up by 63% in the first half of 2015 year-over-year. Revenue in the third quarter of 2015 is also forecasted to be up 53% since the same period in 2014. The only thing investors are worried about are the lackluster sales in the coming holiday shopping season. The upcoming winter season generally makes up a massive portion of the company’s sales, with 45% of 2014 revenue generated in the fourth quarter. If GoPro is to repeat this success in 2015, holiday sales will have to be in the range of $900 million, which is unrealistic. If sales grow by only 10%, however, they will total about $700 million, which is a robust figure.
Therein lies the issue; good is not enough for stock market analysts, because a company must be excellent. Never mind that financial numbers are strong and growth potential is still huge.
With strong competition from similar products looming on the horizon, it’s going to be extremely difficult for GoPro to maintain its dizzying sales growth. (Source: “GoPro’s CEO Has Lost $1.4 Billion This Year,” Bloomberg Business, September 28, 2015.) But does it really have to continue growing so fast?
What GoPro cynics are missing is that at less than $30.00 per share, GoPro stock is fast becoming a very attractive buy for those with a nose for bottom fishing.
GoPro is a well-managed company with operating margins in the range of 15%–18%, which grows to approximately 20% when adjusted for earnings before interest, taxes, depreciation, and amortization (EBITDA). With company revenue growing, GoPro could well increase this margin.
But there’s more: GoPro’s balance sheet underlines strong corporate management, with zero debt and $516 million in available cash on hand.
Here’s the Bottom Line on GoPro Stock
What we have here is a company that has shown strong and consistent revenue growth and market cap expansion while maintaining zero debt and healthy cash reserves. It doesn’t take an MBA to realize that with simple factors like this, GoPro stock might be worth a second look.