Why Did GoPro Go Public Now? Think Christmas Lockup Expiration

NEW YORK (TheStreet) -- The hottest topic on the market today is GoPro's (GPRO) initial public offering.

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.

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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."

I don't want to get too technical with IPO rules but as part of early standard start-up procedures companies will typically issue millions of shares to (among others) employees, venture capitalists and mezzanine investors before the general public gets a chance to buy the stock.

As a way to prevent shares from flooding the market (since these early shareholders will want to cash out), a "ban on selling," or lockup period was created. This lockup period expires in exactly 6 months from the first day of trading, at which point, pre-IPO investors are then free to sell their stock.

In this case, in exactly six months, GoPro's lockup period expires on Dec. 26. This is during the holiday period when no one is thinking about their investments. By contrast, that will likely be the only thing on the minds of GoPro's early investors. These shares are burning holes in their pockets.

Twitter (TWTR) is the most recent example. On May 6, the day of its lockup expiration, almost 135 million shares were traded. Twitter had only averaged a little over 13 million shares traded per day. That day the stock closed at $31.85, falling 18%. Early buyers couldn't wait to cash out.

Like GoPro, Twitter's IPO was a success. The stock traded as high as $74 in December after going public at $26 last November, up 184%. But from that peak, shares have plummeted more than 43%, including year-to-date declines of 34%.  

For GoPro, the lockup expiration is one of several bear factors. The most important, the current fundamentals don't jibe with the valuation. Despite its dominant market position, GoPro's first-quarter revenue of $235.7 million was down almost 8% year over year. Earnings of $11 million fell more than 50% due to pricing/margin pressure.

Investors willing to pay roughly 30 times this years Ebitda for this stock must ask themselves what electronic company (other than Apple (AAPL)) can sustain the sort of margins needed to justify that multiple? Selling into strength has always been a sound strategy. And until GoPro falls to $30 the stock remains a short. And as the lockup period draws closer to its end, these shares will begin to make sense.

At the time of publication, the author was long AAPL.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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