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Why GoPro Is a Momentum Stock Worth Trading


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GoProGoPro, Inc. (NASDAQ: GPRO) was one of the hottest Initial Public Offerings of 2014, and is turning into a momentum stock worth trading on both the long and short sides.   GoPro’s unique cameras, which make it easy to capture personal action during a wide range of activities are going to be one of the hottest gifts of the 2014 holiday season. This has made GoPro’s stock GPRO a momentum stock that has more than doubled from approximately $31 per share to well over $80 per share since its Initial Public Offering.

GoPro sells hardware and software that are used by consumers to easily capture, manage, share, and view video content of themselves in action, in many cases while undertaking sports activities. What makes GoPro’s HERO line of cameras different than regular cameras are their design and accessories, which allow them to be attached to a user in a comfortable manner, so they can capture high quality high definition video of their activities. The company makes money selling both the HERO cameras and a wide variety of accessories that help users mount and use the cameras to capture action without hindering movement. They also offer GoPro Studio, a video editing tool that allows users to create professional quality videos of the videos they capture while using GoPro HERO cameras.

The Bullish Case For GoPro

Whether or not GPRO continues to soar as anticipation of the holiday sales season builds is a matter of debate, but the company has the earnings growth momentum that momentum stock traders look for. GoPro has experienced an impressive earnings per share growth rate of 44% over the past three years. Which is complimented by a solid top line revenue growth rate in the high 30% range.

The company’s high growth rate is showing no signs of slowing down, as more people learn about and want to use GoPro’s unique cameras that are used to capture sports and other personal activity in real time. In fact, the fourth quarter of the year, which coincides with the holiday shopping season, is GoPro’s strongest quarter of the year, accounting for 40% of the company’s annual revenue and over half of its annual profits. This means the fourth quarter will likely to see continued momentum and volatility in GPRO, which means GPRO is going to provide many trading opportunities during the rest of 2014.
Hero 4
Not only does GoPro have the holiday season as a tailwind for continued tradable upward stock momentum during the fourth quarter of 2014; in September 2014 they released a new state-of-the-art action camera called the GoPro Hero 4. Their new camera offering, has many of the latest high-end features that video creators want, such as ultra high definition 4K video capability and faster wifi. The GoPro Hero 4 was released at the right time to take advantage of the pre-holiday season buzz and is surely going to help the company book huge sales in the fourth quarter of 2014.

GoPro is also a takeover target for mature technology companies looking to expand into the fast growing video technology segment, of which GoPro is clearly a leader. Any buyout offer or even rumor would send GPRO’s shares soaring.

Reasons To Be Cautious About GoPro

Due to GoPro’s relatively young age and other risk factors that accompany momentum stocks, there are reasons to be cautious when trading GPRO. The company’s shares went through a slight sell-off when it was announced that some of the founder’s GPRO shares are being set aside for a charity, which could cause them to enter the public float.

There is also the end of the lock up period in late December 2014, which means that company insiders and other early investors will be able to sell shares into the public float, which could make it harder for GRPO shares to increase in value or even cause a sell-off. While the end of the insider lockup period does not always cause a sell-off in a company’s shares, the well known high-flying technology stock Twitter experienced just that when insider’s shares became eligible for sale, losing 18% of its value. This could set up a good short-side trading opportunity for GPRO shares around the holiday season, as the company’s shares peak due to a frenzy of holiday buying and then sell-off as GoPro insiders sell the shares, hoping to catch the stock at a near-term top.

GoPro’s valuation is also a concern. With GPRO trading near $90 per share, GoPro is trading at lofty valuation metrics of nine time sales and 284 times trailing twelve-month earnings. These highly elevated valuation metrics raise concerns that shares of GPRO are highly overvalued. Any slow down in revenue growth from its current high 30% range will cause GPRO to sell off, likely hard.

A Safer Way To Trade GoPro

GoPro App
Since the future of GPRO’s stock price is so uncertain and shares of GPRO are difficult to borrow to play GPRO from the short side, traders should consider using options to trade GPRO, rather than buying or shorting the stock outright. While options run the risk of expiring worthless, if they expire outside of their strike price, they can be utilized as an effective trading tool, especially when the odds favor a move in a particular direction. For example, buying put options that are just below the trading price of GPRO in the middle of December, would allow a trader to profit from any end of the year sell-off that develops, as the lockup period for GoPro’s shares expires and new shares flood the market. Put options can also be utilized to protect a long position in GPRO, since any sell-off in GRPO’s share price would be offset by an increase in GPRO put options’ value.

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