Time to Go Long GoPro?

This year has been very tumultuous for GPRO (GoPro) shares. In the first quarter we saw GPRO fall over 30% only to then rally back 50% in the second half. The real story of this year is the crash that has taken place during the end of the third quarter and into the 4^th. Shares are off by 70% from their high. Arguably the reason for the fall is over concerns of the viability of GPRO’s business. Is GPRO a company or a product? Does GPRO have enough in its pipeline to sustain EPS growth for at least 3-5 years out? These is the question analysts have been asking. However, when looking at the fundamentals and technicals I think GPRO offers a good risk/reward entry here for the long-term.

Fundamentals:

Looking very basically, the most attractive thing about GPRO is its low P/E. The P/E right now stands right around 16. We usually only see PE’s this low in low growth stable names. For a stock like GPRO, which is expected to grow over 20% a year for the next 3-5 years this one metric is arguably the most bullish piece of the story. Most growth names in the market now carry PE’s from 50 to some in the few hundreds. Its PEG ratio which incorporates growth shows us a better picture. It currently stands at a projected value of 0.63. That is incredibly low for any stock. Usually a ratio below 1 means a stock is undervalued. AMBA (Amarella) is its main competitor; looking at its fundamentals we see that AMBA has a PE of over 25 but a forward PE of 17, and a PEG ratio of .91 (vs GRPO of .63). Given the relative underperformance this year of GPRO shares, from a fundamental point of view GPRO is cheaper and is fundamentally more attractive then its main competitor AMBA.

Technicals/Sentiment:

The only bullish thing technically about GPRO is its low RSI, everything else is very bearish as it in in a long term downtrend. However, when looking over the chart, you can see some similarities between it and FB (Facebook). Facebook fell below its IPO price by almost 50% and when it did analysts were incredibly bearish even though Facebook was still projected to have solid growth in the medium to long term. GPRO is in a similar situation, a fairly new company that has been demolished because of its valuation and future growth prospects. Yet, those prospects are still in tact, they are expected to have a good holiday season, and now is trading at a cheap valuation. I would much rather be a buyer ahead of the earnings season because I think the likelihood of an upside surprise is greater then the potential downside surprise. I think one reason the stock has fallen so much in Q4 is also due to tax loss selling. So this trend may continue for a few more weeks until Christmas time.

I think the best way is to buy the stock rather then options. Options are extremely expensive and wont leverage gains that much. However, the way that I would use options is to write covered calls. With the IV so high one can sell calls to reduce net cost and increase their return. If one were to buy GPRO now, a covered call trade would be to buy the stock here at $20 and sell the January 23 call for $1. Should GPRO rally past $23, you would make 20% in less then 2 months, and if GPRO falls you cut your cost by 5%.