Name That Trade – $GPRO: Don’t be a Hero

by Dan October 28, 2015 2:41 pm • Commentary

Event: GoPro (GPRO) reports Q3 results tonight after the close. The options market is implying a 14% one day move which is rich to the 11% average over the 5 quarters the stock has been public.

Sentiment: Wall Street analysts remain fairly bullish on the stock with 14 Buy ratings, 7 Holds and No Sells, with an average 12 month price target of $55.  Short interest sits at a whopping 41% of the float.  

Price Action / Technicals: GPRO is down 53% on the year, and down 70% from the all time highs made in Oct 2014.  The technicals are pretty simple, there is no support below current levels until you to its June 2014 IPO price of $24, and given the stock’s nearly 50% decline in what feels like a straight line since early August, there is little overhead resistance until $40, or 35% higher than current levels:

GPRO since June 2014 IPO from Bloomberg
GPRO since June 2014 IPO from Bloomberg

Valuation: there was a time where the one trick pony action camera maker traded at a ridiculous valuation, Investors justified that by trying to attach some sort of media ecosystem value to the company, which was total nonsense.  The stock’s sharp decline of late is likely the result of investor fear of competition and what appears to be large deceleration in growth in forward consensus estimates.  BUT, if you believe existing consensus for 15% earnings growth and 20% sales growth in 2016, then the stock at 2x 2015 sales and 17x 2015 earnings is quite reasonable for a company that claims to have unique positioning in a growing market.

My Take: During the entire way up after the IPO, and the entire way down since the highs, it has been my view that this company would be the poster-child for overvalued /overhyped piece of crap stock for this leg of the bull market.  I apparently have had good company in this view as short interest has been steadfast for months at 40%+.

Just this morning I saw this story about a tiny clip on camera from EE (here) that can live stream HD video to a smartphone. Apple will get around to this market, and that likely means the end of GPRO, unless of course Apple was interested in doing a sort of Acqui-hire for Nick Woodman, his products and brand, as they did with Beats last year.  A 50% premium on GPRO’s current $4 billion market cap would make the value about 3x sales, not dissimilar to the valuation AAPL paid for Beats (a little more than 3x 2014 sales).  This is pie in the sky sort of stuff, but I suspect Woodman and the vibe he has built around his products could be an interesting complement to AAPL’s brand and mesh well with some of their aspirations in wearable devices. I’d probably take a shot on the long side of the stock on weakness to the mid $20s.

So what’s the trade?   


Here are some hypothetical trades dependent on your current positioning or directional inclination in the stock:

Bullish short term/stock alt: play for a sharp bounce following tonight’s results:

GPRO ($29.50) Buy Dec 30/40 call spread for 2.25


Bullish longer term: play for a takeout in the coming months:

GPRO ($29.50) Buy the April ’16 24/36 risk reversal (buy April 36 calls, sell April 24 puts) for even


Bearish/hedge: play for a move back to its IPO price of $24 between now and year end:

GPRO ($29.50) Buy the Oct30th weekly 28.5/24 put spread for 1.40