GoPro Stock Is Still Attractive -- if You're a Short, That Is

NEW YORK (TheStreet) -- In a span of a couple of months, GoPro (GPRO) -- once heralded as 2014's best IPO -- has become the year's best short candidate. No one could have pictured that.

The stock closed Thursday at $47.97, up 3.57%. But shares are declining nearly 12% so far this morning (down to the $42 range as of 11 a.m.) following GoPro's earnings results, which delivered an operating loss of $16.7 million.

Keep in mind that a 10% decline is peanuts when considering that as long as GoPro stock stays above $40, shares are still up more than 66% from GoPro's high-end initial offering of $24 per share.

Thursday's GoPro earnings were yet another reminder of how IPO exuberance remains one of the pitfalls of the stock market.

And while the stock may seem attractive after this decline, it's not. Because even at this seemingly more attractive valuation, the shares still command roughly 30 times this year's EBITDA, which doesn't make sense.

As I've told you on two other occasions, GoPro is a solid short until the stock falls closer to the $30 range. The way I see it, until GoPro's insider-sales lockup expiration comes, which I'm projecting to be on Dec. 26, there is still 30% downside risk to these shares.

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.

As with Twitter, there are plenty of venture capitalists and mezzanine investors with GoPro stock burnings holes their pockets. December can't come fast enough. Value hunters who are thinking of buying today have to explain what's going to send the stock higher from here. And if Thursday's earnings results were any indication, this company is far from picture-perfect.

Despite claims about how GoPro will turn itself into a media power, this is still an electronics company. Until the numbers say otherwise, astute investors should make this distinction.

Accordingly, it only makes sense to evaluate GoPro as we would other electronic companies like Sony (SNE), JVC (JVCZF) and Samsung (SSNLF). But here's the problem: electronics companies operate in a commodity business. The only guarantee within the industry is that price of electronics will drop over time.

That's what's hurting Sony.

There has been no company, outside of Apple (AAPL), that has proven capable to maintaining the sort of profit margins necessary to consistently grow the bottom line.

So what does this mean for GoPro?

It means that even though the GoPro holds a strong 45% share in its core action-camera market, the company still has to work almost three times as much as Apple to generate a profit. That means higher operating expenses. Management has to stretch the company's resources.

It wasn't all bad news, however.

Despite the punishment the stock is taking today, GoPro did beat on both revenue and earnings, delivering 8 cents per share on revenue of $245 million. Customers love the product. The stock, however, makes no sense trading at close to 100 times 2013 earnings.

For this stock to work, GoPro's management has to keep pounding the idea that the company can pivot into the realm of media. But even if GoPro is successful at this transition, management will still need to figure out how to monetize this strategy. It won't be a pretty picture if they can't.

At the time of publication, the author was long AAPL, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates SONY CORP as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate SONY CORP (SNE) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and a generally disappointing performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 11.0%. Since the same quarter one year prior, revenues rose by 41.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has significantly increased by 59.15% to $4,090.97 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 38.87%.
  • The current debt-to-equity ratio, 0.57, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that SNE's debt-to-equity ratio is low, the quick ratio, which is currently 0.61, displays a potential problem in covering short-term cash needs.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Household Durables industry. The net income has significantly decreased by 228.4% when compared to the same quarter one year ago, falling from $1,044.22 million to -$1,340.40 million.
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Household Durables industry and the overall market, SONY CORP's return on equity significantly trails that of both the industry average and the S&P 500.

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