- GoPro stock has tanked after the disappointing outlook and Karma recall.
- Shareholders trust in the management is eroding.
- GoPro is currently trading at lower multiples. But is the stock a buy?
With the holiday season around the corner, consumers are busy searching for the products to buy while investors are busy searching for the companies whose products consumers are buying. Just a couple of week back GoPro (NSDQ:GPRO) was one such company on which investors were willing to bet as its products were likely to fly off the shelves of retail outlets. But then the things changed. While GoPro's flagship Hero 5 camera continues to enjoy strong demand, same can't be said for its stock. The stock has tanked 30% in last one month due to multiple reasons, and many investors don't see any future prospect for the company. But there are also investors who feel that GoPro stock has over corrected. So the question is whether GoPro stock is a value trap or a value buy?
Lower Multiples, But Cheaper Valuations?
The recent crash in GoPro's stock price has brought the valuation multiples to the ground. GoPro's PS ratio has declined from 2.2 in early October to 1.3 as of Friday. GoPro is currently trading at a market cap of $1.41 billion (50% down in last one year) and analysts expect GoPro's 2017 revenue to come in at $1.46 billion, giving it a forward PS of less than one. Many investors consider such low multiples as an attractive buying opportunity. But what investors must keep in mind is that lower multiples don't automatically mean cheaper valuations. A stock can have lower valuations than its peers and even its historical average and still remain expensive. There are analysts who are pointing to the fact that two years back GoPro was having similar revenue as of today but was trading at $50 a share and concluding that the stock is undervalued now. But I think the stock was overvalued then. Also, the narrative in the past two years has changed, for the worse.
The PS ratio is largely driven by growth potential, margins and risks. The main reason for the decline in the multiples is that earlier the market was factoring in a higher future growth and lower risks than what the recent events have suggested. The market is readjusting the valuation based on the latest information. However, there might be a possibility that strong bearish sentiment around the company may have led to a correction which is slightly larger than warranted by the fundamentals. But I believe that unless GoPro comes out with a strong positive news, the stock price is likely to remain depressed for a long time.
Changing Market Sentiment
GoPro stock had shot up after it reported a better than expected Q2 earnings. It had continued its momentum on the back of buzz around the launch of Karma drones and Hero 5 cameras, with the stock gaining more than 50% after the Q2 earnings. However, the last one month has been brutal for GoPro investors (not the first time) especially after the disappointing earnings and the Karma recall. The recall of Karma, which was supposed to be GoPro's flagship product was the final straw. Sentiment graph on StockTwits shows that bearish sentiment on the stock has more doubled in the last one month.
The increasing bearish sentiment can be seen in the short interest too. The short interest in GoPro has jumped almost 10% during the fortnight ending October 31st from the previous period. The total number of shorted shares has jumped from 33.23 million to 36.63 million, or 39% of the total float! The days to cover has shot up to 7 days.
The recent events and the way they were handled have led many people to question management's ability in solving GoPro's long term problems. The recall of the flagship product didn't go down well with investors. And this is not the first time management has botched a flagship product. The pricing strategy behind the Hero 4 camera was a disaster. There are still several supply side issues which are dogging the company and are likely to impact its Q4 sales. In the Q3 earnings call, management accepted that there are few "execution issues".
But the problem goes beyond execution issues, there is also the question of trust. There are law firms which have launched investigations into whether GoPro knowingly withheld the information regarding the Karma drones problem during the Q2 earnings call. The management needs to lay down a clear-cut strategy for sustainable growth and build investors confidence. (Also Read: Can GoPro Stock Bounce Back After Its Bad Karma?)
This holiday season is not likely to be a great one for GoPro investors. The stock has crashed 30% in the last one month and its future prospects remain bleak. The recall of Karma drone will not only affect its sales but also dent its brand image. The risks around GoPro stock remain elevated while growth prospects have dwindled. The commoditization of sports camera and drone market will act as a strong headwind for Gopro.
With one bad news after the other, the bearish sentiment around the stock has only strengthened. But on the positive side, the demand for Hero 5 line of cameras, which are likely to contribute the majority of GoPro's revenues, remains strong going into the holiday season. GoPro needs to ensure an adequate supply of Hero cameras during this season. Another bad quarter will spell a disaster for GoPro investors. On the whole, the GoPro stock still remains a risky bet at current levels. GoPro cameras are likely to be a better investment than GoPro stock this holiday season.
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