Should You Buy GoPro Inc (GPRO) Stock Going Into Q4 Earnings?

Should You Buy GoPro Inc (GPRO) Stock Going Into Q4 Earnings

GoPro (NASDAQ:GPRO) stock is on a tear going into its Q4 earnings. After crashing by more than 50% last year, the stock has returned around 25% in this month. Defying the overall downbeat mood in the market, GPRO stock jumped more than 7% yesterday after news emerged that BlackRock (NYSE:BLK) has increased its stake in the action camera maker. In a report filed with the SEC, BlackRock disclosed that it has purchased additional one million shares of GoPro, taking its stake in the company to more than 6%. After a long time, since mid-October, MACD for the stock has turned bullish, indicating that GoPro stock has strong momentum going into the earnings. GoPro reports its Q4 2016 and FY 2016 earnings on Thursday, 2nd February.

Will GoPro Earnings Meet Expectations?

Analysts' expect the action camera maker to report an EPS of $0.23 against a loss of $0.08 it had reported in Q4 2015. On the revenue front, GoPro is expected to report $577.01 million, a 32.2% jump from what it had reported in the same quarter last year. The analysts' estimates are lower than the company's own guidance. GoPro has guided for $625 million in revenues and EPS of $0.3.

While the YoY growth expectation paints a very optimistic picture, investors must keep in mind that 2015 was a gap year for GoPro in terms of new product release. In 2015, GoPro had released only the Hero4 Session camera which had turned out to be disastrous from the brand as well as margin perspectives. Compared to 2014, when the company had launched the Hero 4 camera, these estimates fall short. Back then GoPro had reported an earnings of $0.74 a share on revenues of $633.9 million. Many analysts consider this underperformance as a sign of increased competition and the saturation of the action camera market.

GoPro's earnings are likely to come in line with expectations. During the holiday season, the company had reported that its camera's are seeing strong demand. Camera unit sales were up 33% YoY on and up 35% YoY at other major retailers. The ASPs will be higher this year due to the higher percentage of Hero 5 cameras in the sales mix. While the recall of Karma drones was definitely a missed opportunity for GoPro, the company had an unexpected hit in its $300 Karma Grip. The sale of Karma Grip, which is an electronic stabilizer, will help in improving the margins further. Pacific Crest analyst Brad Erickson sees GoPro reporting a better than expected quarter due to strong demand for its cameras. To quote him:

"In light of better-than-feared sell-through, we are raising our unit estimates by a bit more than 10% to 2.1 million units in Q4 from 1.9 million and are raising our ASP estimate slightly as our store checks showed an impressive ability to pivot point-of-purchase displays to selling the Karma Grip ($300 electronic stabilizer) when it became clear the Karma would not be launched." 

Karma Will Once Again Be In The Limelight

But more than the earnings itself, investors must look out for the company's 2017 guidance and its schedule for the Karma relaunch. The company had earlier said that it expects a double-digit YoY revenue growth in 2017. Analysts are modeling 17.7% growth in revenues. A strong outlook could send the stock soaring. The company has also said that it expects 2017 non-GAAP EPS to be positive. The company recently announced a restructuring plan which is likely to save around $650 million in non-GAAP operating expenses.

Investors will also be watching out for any information regarding the timeline for the Karma drone re-launch. GoPro stock had surged earlier in the month when the company had announced its plans to re-launch the Karma drone. However, the company hadn't disclosed any details. There is a lot of hype and expectations from the Karma drone which is at the center of a bullish thesis around the stock. However, given the competition in this segment, the dominance of DJI and the negative baggage it carries due to the recall, the success of Karma drones are far from guaranteed.

GoPro Stock Presents An Opportunity For Enterprising Investors

The recall of Karma drones and the production issues at the beginning of the quarter has resulted in a strong bearish sentiment around the stock. GPRO remains a heavily shorted stock. In the latest reporting period, the total number of shorted shares came in at 33.35 million, a massive 35% of the total float, with days to cover around 10 days. While the short interest shows the bearish sentiment, it could also result in a short squeeze.

While GoPro stock continues to remain a highly risky bet, Q4 earnings provide an opportunity for risk seeking investors. Considering that GoPro stock is prone to wild swings, a strong 2017 outlook or positive commentary on Karma relaunch could send the shares higher. This upward movement could be further accentuated by a short squeeze. However, long term investors must wait till the earnings to get a better picture. If you are looking to invest in tech stocks which have better risk reward proposition than GoPro, have a look at our Top Tech Stock Picks which have consistently outperformed the market.

Kumar Abhishek Kumar Abhishek   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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