Last month, I advised investors to short GoPro (GPRO, Financial) twice. GoPro’s fundamentals were looking very cheap, but I said that its business model is susceptible to increasing competition. Despite the company’s apparent cheap valuation, investors could gain as much as 15% profit by shorting GoPro.
It has been less than 20 days since I called GoPro a short, and the stock is already down 30%. I wasn’t expecting GoPro to fall so fast, but now that the stock has fallen to under $12, investors should book profit by closing their short positions. That being said, GoPro may still have more downside to offer, and investors should stay away from the stock for the time being.
GoPro’s growth is slowing down
In my previous article, I said GoPro’s strong revenue growth is not sustainable, and the stock would lose considerable value once it starts showing signs of weakening sales. And that’s exactly what happened as GoPro issued a massive Q4 warning just a few days ago, sending the stock into a downward spiral.
The company said it expects to report Q4 revenue of $435 million, much below prior guidance of $500 million to $550 million and a $511.9 million consensus. To make matters worse, GoPro also announced that it is cutting 7% of its 1,500-plus employee workforce; that would lead to $5 million to $10 million in restructuring costs.
Slowing growth and reducing workforce clearly show that GoPro’s sales are slowing down. The company’s fad-based business model is now collapsing, and investors punished the stock as it lost over 20% of its value in after-hours trading. A growing company never cuts back its workforce and spends hundreds of millions of dollars on share buybacks. Clearly, the company’s days of double-digit growth are over.
GoPro may look more underpriced based on its fundamentals, but the stock is a value trap that should be avoided. The growing competition is taking its toll on GoPro, and with many companies expected to enter the market, investors can expect the stock to fall to single digits in the coming months.
Conclusion
GoPro may have more downside to offer. However, investors who shorted the stock should lock in the gains and cover their short positions. At a trailing P/E ratio of 9, GoPro looks pretty cheap for a “growing” tech stock, but due to the reasons mentioned above, investors should not make the mistake of buying the stock on the pullback.
