- GoPro stock has been rallying strongly after the company bought video editing apps.
- The GoPro stock does not seem to have been affected much by Ambarella's weak Q1 2016 guidance.
- This suggests that the bad news has probably been fully baked into GoPro stock.
Shares of extreme action video camera manufacturer GoPro (NASDAQ:GPRO) have rallied more than 20% over the past couple of days. A big part of that rally seems to have been driven by the announcement that GoPro was buying two video editing apps, Replay and Splice, for a combined $105M in cash and GoPro stock.
5-Day GoPro Stock Returns
Source: CNN Money
Replay is a French app by Stupefix that contains features that allow users to quickly select and combine video clips, add content including music, transition effects, and text overlays. Additionally, the app allows users to share their finished videos via social media.
Splice is an app by Austin-based Vemory that allows users to share a slew of both basic and advanced video-editing tools. Both are iOS apps and GoPro has promised to release video editing apps for Android OS later in the year.
The move by GoPro is in direct response to various Wall Street bear calls that pointed to GoPro’s glaring lack of video editing and sharing tools despite classifying itself as a media company. Notably, James Faucette of Morgan Stanley downgraded GoPro stock in October saying that although the company’s video editing tools were a step in the right direction, they
‘‘still fall short of already available features in other video editing apps on Android and iOS devices. As such, GoPro devices will "remain a niche alternative" to smartphone videos and the company's overall growth will slow down and fall in-line with the broader digital camera market.’’
The fact that GoPro stock has made such strong gains after the purchase implies the shorts have been rushing to cover on the news. GoPro stock is one of the most heavily shorted stocks on the Nasdaq, and nearly 40.2% of the company’s outstanding shares were in the hands of short sellers in Jan 2016. Despite the high short interest, GoPro stock’s days to cover is just 2.6 thanks to the heavy trading volume. That's one of the reasons why the stock is so popular with the shorts because it allows them to quickly cover and avoid a short squeeze in the event of any positive catalysts such as the recent news emerging. Coincidentally this is the same reason why GoPro stock is so volatile.
The momentum in GoPro stock appears to be very strong and it has continued rallying even after Ambarella (NASDAQ:AMBA) shares came under pressure after the company issued weak Q1 2016 guidance. Ambarella reported Q4 2015 revenue of $67.96M, good for 5% Y/Y growth and $2.13M higher than the consensus estimate. The company also reported EPS of $0.64, topping estimates by $0.16. It was Ambarella’s first quarter guidance, however, that spooked investors.
Ambarella guided for Q1 revenue of $55M-$57M, below the consensus estimate of $62.4M. The company said that it expects Q1 net income in the range of $8M-$10M, considerably lower than fourth quarter net income of $21.6M. Ambarella stock tends to have a big positive correlation with GoPro stock because about 25% of Ambarella’s revenue comes from GoPro. Ambarella’s weak Q1 guidance, however, did not come as a surprise to anyone considering that GoPro had issued terrible first quarter guidance. GoPro said that it expects first-quarter revenue of $160M-$180M, a massive 50.4%-56% year-over-year decline. The company also said that it expects full-year revenue of $1.4B-$1.5B, representing a 6%-12% Y/Y decline. This could be the first time that GoPro will post a full-year revenue contraction since going public.
The fact that Ambarella’s weak guidance has not dragged down GoPro stock suggests that the bad news has already been fully baked in. This is certainly good especially for short-term investors because it increases the chances of the stock making strong gains when another positive catalyst emerges. Maybe the next big thing for GoPro will be the launch of its Karma drone later this year. The stock is still down 19%YTD and might go on to make strong gains during the launch of Karma.
The long-term performance of the stock, however, is more likely to depend on whether GoPro’s new product launches are able to gain much better traction than its Hero4 Session camera which has proved to be a disaster. During its last earnings call, GoPro announced that it was planning to kill some product lines but did not say anything about new product launches. GoPro traditionally launches new cameras during the second quarter, so long-term investors should stay tuned to see if the company will break away from that tradition.