- GoPro stock has crashed 16% in last 5 trading days, breaching the 50 day SMA support level.
- GoPro stock can rise again on good Karma.
- GoPro stock remains extremely volatile. Risk averse investors should maintain their distance.
Around a month back action camera maker, GoPro (NASDAQ:GPRO), launched its highly awaited Karma drone and Hero Session 5 camera with much fanfare. After all, this was GoPro's first major launch in more than a year. And as I had warned in my previous post, the stock remained volatile. The stock shot up more than 20% after the successful launch, partly carried by the hype and partly on relief. But once the hype faded and reality sank in, the stock crashed. In the last one week, the stock is down more than 15%. But while GoPro stock is down, it is still not out.
Why GoPro Stock Is Crashing
There are two main reasons for the crash. Firstly, after the launch, the stock had soared much higher than the fundamentals warranted. The jump in the stock price was largely a kind of "relief rally". Investors no more expect GoPro to go bankrupt anytime soon. Before the launch the threat of irrelevance and bankruptcy was high.
Also Read: Analyzing The Bankruptcy Risk For GoPro Inc
For the past one year, it had been raining bad news for GoPro investors. Sales were declining and the company turned from a profit making one to loss-making one. The stock price also took a hit, with the company losing more than 50% of its market cap in the last one year. GoPro had also botched its Hero Session 4 camera launch in Q3 last year. It was forced to cut the camera price twice by $100 each and had to write down millions of dollars in inventory. As a result, both the brand and the balance sheet took a hit. With no new products, millions of dollars in losses and no visible future growth, many analysts had written off the stock. According to Global Equities’ Trip Chowdhry, the "investment thesis [for GoPro stock] were being built on imagination". But with the recent launch the narrative has been changing, even if only marginally.
The Second reason was the launch of Mavic by DJI, the industry leader in drones. Mavic is lighter, smaller and can fly higher, faster, further and for a longer time than GoPro's Karma. But more importantly, Mavic has two important features which GoPro lacks. The "obstacle avoidance system" and "follow me" feature. The absence of these two features disappointed many GoPro fans at the time of launch. On the reason for not including these features, which were already there in many other drones, CEO Nick Woodman had said that the experience provided by other drones are not up to mark and will disappoint customers. And he may be right to some extent. But many feel that having those features is definitely a plus. To be sure, Karma too has several advantages over the Mavic, but competition will be there, which will impact its sales. Also, Mavic will be available more than a week ahead of Karma.
GoPro Stock Can Soar Once Again On Good Karma
While GoPro stock is back to more reasonable levels, it can soar once again if it reports good numbers during the coming Q3 and Karma and Hero Session 5 sales numbers don't disappoint. Currently, there are no numbers to go by. But there are several reasons many expect them to do well. Firstly, Hero Session 5 is a first major update from the previous version in more than a year, hence the product refresh is likely to drive sales. Also the timing of the launch, just before the holiday season, is perfect. And while there are several competitors for Karma, it enjoys several advantages over the others.
Karma is priced reasonably. At $1,099 you can get the Karma drone with the Hero Session 5 camera. And for those who already own a Hero Session Camera, the price of the drone at $799 will be very competitive. The launch of GoPro plus which makes editing and sharing of videos much easier will be another advantage. But more importantly, the quality of video/pictures and the brand will be major attractions.
GoPro Stock Remains A Risky Bet
While GoPro stock still has potential, it remains a risky bet. The stock is down more than 15% in just 5 days. One way to measure risk is volatility using variance or standard deviation. While the stock has been volatile historically, volatility has increased in the last few weeks. If you look at the Bollinger bands chart below, you can see the increase in volatility. The stock has hit the upper and lower limits multiple times. The upper and lower limits are 2 standard deviations of the 20 day SMA. The chart also shows the recent spike in the standard deviation.
GoPro stock has seen many wild swings. In the last one month, on more than 10 trading days, the stock moved by more than 4% (up or down). And volatility is likely to remain in the coming days. GoPro stock has a very high beta of 2.34, indicating that stock is likely to move 2.34 times the movement in the index . The risk in the stock is also due to the fact that a lot is dependent upon the success of the newly launched Karma drone. There is too much dependency on just one event.
And rising short interest will also add to the risk. In the period ending September 30th, short interest in GoPro stock jumped by 4% to 34.16 million shares from 32.7 million shares in the previous fortnight. The short interest makes up 35% of GoPro's total float. And while days to cover has declined, it was mainly because the average daily volume had almost doubled in that period. But now the volume is also coming back to its usual levels so the days to cover will shoot up.
The launches of the Hero Session 5 and Karma drones have given a breather to investors from the relentless decline in the stock price. The future is dependent upon the upcoming earnings and more importantly on the sales of Hero Session 5 cameras and Karma drones. Risk averse investors should wait until there is further information regarding the sales of these two products. GoPro stock currently remains a risky bet at best.