- GoPro shares have tanked badly after the company failed to meet both top and bottom line expectations during its third quarter fiscal 2015 earnings call.
- The company's guidance for the fourth quarter also came in below consensus expectations.
- GoPro shares are heavily shorted.
- At what point will the inflection point come?
Shares of extreme action camera maker GoPro (NASDAQ:GPRO) have plunged more than 16% in after-hours trading after the company announced third quarter fiscal 2015 earnings that failed to meet expectations then went ahead and issued weak guidance. GoPro reported that third quarter revenue clocked in at $400.3 million, good for 43% Y/Y growth, while non-GAAP EPS of $0.25 was more than double the $0.12 the company recorded in the prior year quarter. Despite the healthy top and bottom line growth, GoPro’s latest results failed to meet expectations: the reported revenue missed consensus estimates by $33.3 million while EPS was off by $0.04.
GoPro said it shipped 1.59 million cameras during the quarter, down 3% Q/Q but up 46.3% Y/Y.
GoPro stock cratered about 13% on the news, but later tanked a bit more after the company issued fourth quarter guidance of $500 million-$550 million for revenue and EPS of $0.35-$0.45, both of which came in below consensus of $690.5 million for revenue and EPS of $0.82.
GoPro shares are now trading at all-time lows after their latest hammering.
Why GoPro Shares were Badly Hammered
GoPro’s woes seem to have stemmed from the timing of the release of its new cameras in the second quarter instead of the third quarter as has been the case in the past. In 2014, GoPro debuted its new cameras in the third quarter but this year’s launch took place during the second quarter.
It was, however, GoPro’s weak guidance that provided the final straw. For reference, it should be noted that GoPro reported revenue of $633.9 million for last year’s fourth quarter. The company’s guidance therefore implies that revenue will fall roughly 17% Y/Y, which would mark the first Y/Y revenue decline by the company. To be fair, GoPro’s last year’s fourth quarter results received a nice boost from the launch of the popular Hero4 cameras.
GoPro is known to be extremely conservative with its guidance, so the company could have deliberately low balled its guidance to give itself a chance to top its guidance. But it could also mean that the company expects more competition from new entrants into the space such as Xiaomi.
GoPro stock has usually been very volatile after an earnings calls, swinging to the red and back by more than 10%. But this time round the story could turn out to be quite different. The biggest reason why GoPro stock fell badly after the earnings call can be chalked up to the huge number of shorts that have ganged up on GoPro stock. The market was aware of the possibility that GoPro would fail to meet expectations due to the timing of the launch of its new cameras this year, and the shorts were ready to pounce. Over the past two months coming into the earnings call, GoPro’s short interest jumped more than 240% from 9.3 million shares to 31.8 million shares, or about 52% of the company’s shares in the hands of shorts. Having more than half of a company’s shares in the hands of shorts is the perfect recipe for extreme volatility.
Given the difficult comps that GoPro will be facing in the fourth quarter, it’s not very likely that the shorts will back down soon. GoPro does not have a product refresh lined up for the traditionally hot holiday season. Short interest in the shares is likely to remain high as long as investors can sense some weakness in the company.
But with such a large number of the company’s shares in the hands of shorts, any positive surprise by the company later on could provide a very fertile ground for tremendous short squeeze potential as the shorts rush to cover. This was demonstrated on the day of the earnings call when the shares had made gains of 7% prior to the release of the report probably due to some shorts being uncertain of what to expect.
Good Long-Term Potential
GoPro is looking to counter growing competition by diversifying its business. The company plans to soon launch a consumer drone. China-based DJI, maker of the popular Phantom consumer drone, is on course to do $1 billion in sales this year and is valued at 8 times sales, significantly higher than GoPro’s 5 times sales valuation.
GoPro stock sports a PEG ratio of just 1.1, which is unrealistic for a growth company. It’s safe bet to say that most of the bad news has been baked in and the shares are a good buy at this point.