After the stock skyrocketed 31% on its first day to close at $31.34, shares hit an intraday high of $40.47 on the second day of trading. On Monday, shares closed at $40.55. The stock closed Tuesday at $48.80, representing 103% jump from GoPro's high-end initial offering of $24 per share. Shares are currently around $43.70.
Calling this a successful IPO would be a gross understatement. It was picture-perfect. But investors are getting carried away. This is not likely to end well.
While GoPro does hold a strong 45% share in its core action-camera market, the company has done little to deserve its $6 billion market cap. At around $48 per share, the stock is trading at 98 times 2013 earnings. There's no justification for this -- not when 2013 margins fell 6.5% to 36.7%.
The 103% gains in a span of just four trading sessions can only be defined as irrational exuberance. As soon as logic returns to this stock fair value will point to around $30 per share, suggesting a decline of roughly 40% from Tuesday's close.
Retail investors are betting too much and underestimating potential threats from (among others) Samsung (SSNLF) and Sony (SNE) -- two larger rivals that have underinvested in this area. When they change their minds, GoPro's earnings won't be able to match current expectations. These same investors who are betting on management to pivot quickly towards a media strategy will be the ones left holding the bag. It won't be a pretty picture.
For that matter, retail investors should not underestimate the timing of GoPro's IPO. I don't think it was by accident that it was scheduled for June 26. Why not wait for July 7 after the July 4 holiday passes? In my opinion this would have made more sense. But why waste an opportunity to capitalize on retail ignorance?
An email sent to GoPro's representatives requesting clarity on the IPO scheduling was not immediately returned. But here's my take -- there's this thing called "lockup expiration."