Chart of the Day – $GPRO: Hero To Zero

by Dan December 11, 2014 1:48 pm • Chart of the Day• Commentary

Another day, another head and shoulders pattern, or the Triangle of Death. No matter what you want to call it, it looks bad for shares of GoPro (GPRO):

GPRO since June IPO from Bloomberg
GPRO since June IPO from Bloomberg

The stock is down 40% from the all time highs made in early October, shedding more than $3 billion in market cap. But it is still up 150% from its June ipo.  The price action in the stock has been driven by a relatively small float of only about 32 million shares after the 20.5 million share ipo and the 12 million share secondary offering a month ago. The demand for shares has caused the stock to trade a ridiculous valuation for a gadget company, topping out at a price to sales ratio of above 7, now slightly below 5.  Understandably, short interest has shot through the roof at about 34% of the float. Despite the small float, the stock has traded about 10 million shares a day (on average half of the ipo’s size!)  The push and pull of exuberant bulls and value conscious bears combined with the hard to borrow nature has created a set up for day traders that has been irresistible.

But this could be about to change as more than 100 million shares are set to come off of the 180 lock up expiration on Dec 23rd, per Bloomberg:


The announcement of the founders breaking the lock up to gift shares to their charitable trust followed by the early secondary in November have weighed on shares. This has placed more focus on what could happen to the supply demand equation when more than 100 million shares are free to trade.  Make no mistake about it, this is a treacherous set up with the stock down so much in such a short period of time combined with a crowded short (despite the high cost to borrow shares read here).  

So how low can it go? Who knows.  Aside from the supply/demand situation, GPRO saw that run up into the Oct highs for two fundamental reasons. First, the company got a lot of press about a whole slew of new products that were launching in front of the holiday season, and second the notion that user generated video could result in a social platform that could cause the stock to garner a higher valuation.

The hardware is just that, and should not command this sort of valuation given potential competition with upstarts set to compete on form and price. And that will hit margins. Also, remember the Flip camera?

The social platform component is nonsense as I’m not sure what the big obstacles are for anyone to post their videos on YouTube.   My sense is that Q4 sales with the new products will likely mark the top for months in investor interest in the product. That coupled with the new supply of shares could see continued weakness in the coming weeks/months to the range where the stock broke out from in early Sept, which would be $40 to $50.