This One-Trick Pony Is An Immediate 'Sell'

Melvin Pasternak's picture

Wednesday, January 20, 2016 - 7:30am

by Melvin Pasternak

Tech stocks often lead the market down, and the current decline is no exception. Just two weeks into the new year, the S&P 500 is down 8%, which is substantial, but not as big as the tech-heavy Nasdaq Composite's 10%-plus drop.  

While tech weakness is widespread, one of the most vulnerable stocks is extreme action camera company GoPro (Nasdaq: GPRO).

[Note: The weakness in tech has put solid companies on sale, including two major firms that made our list of the Top 10 Trades for 2016. You have until 11:59 p.m. on Thursday, Jan. 21 to access the report. Click here.]

Shares of GoPro are down 36% in 2016 and now trade for less than half their $24 IPO price. The latest blow to the stock came when the company announced ugly preliminary results for the fourth quarter last week.

Management said they expect revenue to be just $435 million. That would represent a 31% year-over-year decline and is significantly below the $521 million expected by analysts and the $500 million to $550 million GoPro had itself projected. 

In response, the company laid off 7% of its workforce -- about 105 of 1,500 employees -- and will take a severance charge this quarter of between $5 million and $10 million.  

Following the news, shares plummeted more than 20% in two days, hitting an all-time low of $11.23. Yet, we think there's still time for traders to make big money on the downside. 

Here are five compelling reasons why:

1. No Technical Support In Sight

The recent selling is just the latest damage to the chart. From its fall 2014 all-time peak above $96, shares have lost almost 90% of their value. 

GoPro Stock Chart

After GoPro went public at $24 in June 2014, optimistic traders pushed the price almost to the century mark, but shares failed at this round number resistance.

By March 2015, the stock had fallen to about $37 where it found support and rallied, peaking around $65 in August. GPRO then rapidly sold off, breaching critical $37 support about a month later. 

From there, the stock has declined in an almost straight line. Last week's disappointing revenue announcement created a large gap that needs to be filled for the stock price to reverse. There is no current support, so shares can easily go lower, particularly if we see more weakness in the Nasdaq.

2. Reduced Pricing Power
 
A key reason for GoPro's poor performance is that the company is a one-trick pony. 

When GoPro developed its technology, the company had a unique product. But the hardware is relatively easy to replicate and heightened competition is weakening GoPro sales and margins. Competitors like Polaroid and Garmin (Nasdaq: GRMN) have created similar products and many sell for a fraction of the price of GoPro's cameras.

Polaroid's Cube camera, for example, retails around $99. GoPro's competing Hero4 was initially listed at $399. With weak sales, GoPro lowered its price from $399 to $299, then to $199. This price cutting managed to knock $21 million off the company's Q4 revenue projection.

3. Virtual Reality Is Virtually Worthless (So Far)

GoPro has worked hard to make an impact on the virtual reality space. The company plans to soon release a new model of its spherical camera that can generate 360-degree video content.

But once again, the GoPro product seems too expensive. At a recent conference in Las Vegas, Kodak and Nikon revealed cameras that film in 360 degrees and record in 4K -- the resolution needed for virtual reality. Kodak's camera retails for just $499. Meanwhile GoPro's 360-degree camera solution costs upward of $3,000 and uses multiple technologies to achieve what Kodak and Nikon have captured in a single device.

4. Original Content Failure

When GoPro first went public, the company tried to differentiate itself by creating a "media entity" that would develop original content. That idea has fallen short thus far.

In June 2015, GoPro CEO Nick Woodman alluded to an "iTunes-type management system" tethered to the cloud that would make it easy to upload, edit and share original video footage.

Today, this so-called "media system" is little more than a YouTube channel with just 3.6 million subscribers. While that number may seem high, it pales in comparison to YouTube star channels boasting subscriber bases in the tens of millions.

To increase content creation, GoPro has partnered with Alphabet's (Nasdaq: GOOGL) Google, encouraging videographers to post 360-degree footage on YouTube's 360 channel.
The partnership is a step toward developing original content and generating virtual reality footage -- which players like Google and Facebook (Nasdaq: FB) seem to think is the next big thing. But GoPro is still miles away from a media system that generates significant revenue.

5. Weak Fundamental Outlook
 
Not surprisingly, these concerns add up to a cloudy fundamental outlook. 

The company is scheduled to report fourth-quarter and 2015 results on Feb. 3. Analysts now project Q4 earnings will fall 91% year over year to $0.09 per share on a 30% sales decline to $445.9 million. For the full year, revenue is expected to drop 17% to $1.6 billion, while EPS is expected to decline 30% to $0.92.

During the first quarter, analysts expect sales will drop 15% year over year to $308 million, and earnings estimates have been on the decline. A few months ago, the consensus was for EPS of $0.24, which would have been in line with the year-ago period. Now, the consensus is for a loss of $0.03 per share.

Given GoPro's poor fundamental outlook and the fact that shares have no current support, shorting the extreme-camera company could still be very profitable for traders.

Recommended Trade Setup:

-- Sell GPRO short at the market price
-- Set stop-loss at $14.71
-- Set price target at $8.11 for a potential 29% gain by Q2 2016

This article was originally published on ProfitableTrading.com: This One-Trick Pony Is An Immediate 'Sell'

Melvin Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.