GoPro: Bad Karma In 2016, Good Karma In 2017?

| About: GoPro (GPRO)

Summary

GoPro is one of the year's worst stock performers, down 50%.

Big decliners like GoPro can present opportunities for trading using options.

The Karma Grip may be a sleeper hit if the company can execute.

One of my favorite strategies is to look for stocks that have performed poorly all year and see if there are any investable diamonds in the rough. GoPro (NASDAQ:GPRO) certainly fits the bill as one of those stocks. Since its meteoric rise post IPO, the decline in the stock price has been horrendous, and the year-on-year comps for revenue, profit, and pretty much every financial metric look terrible.

GoPro is also a very polarizing story, with a few bulls and plenty of bears. The bears have certainly had the better argument, and they have earned the right to declare victory as of this moment. But like anything else in the stock market, there are no absolutes, and on an given day an investor can take the win. That is the beauty of the stock market and why we all keep coming back. It pays to be humble because winning in the stock market is almost always about picking your spots, knowing when to buy and when to sell.

I have decided to have a look at GoPro, and here are the disclaimers. I am new to the stock, and I have never owned it. I do not own a GoPro camera but I have certainly heard of them (and no, I don't work for GoPro or have any relationship with the company). Having never contemplated the company's future with my own money, I am not a preordained GoPro bull or bear and I am not going to pretend to predict its future. As an investor with no existing GoPro position, the simple question is, is it worth buying and can I make money trading this stock? And it is also helpful to consider what might be done if I were a long-term holder sitting on a loss (pretty much impossible to be a long-term holder and be sitting on a profit, given the way the stock has traded). What should I do? How do I recover some of my investment?

There were no GoPro's under our Christmas tree this year, but I may be in the market for a HERO camera in a few months. So I took a look at the website to see what products are new. I had heard about the new HERO cameras, and it was pretty much a given from the last time I looked at GoPro (last year) that they would have gone from the HERO4 to the HERO5. I have not reviewed the specs but it is fair to say it is probably a better camera. What intrigued me was the Karma Grip. I am fairly certain this will be a sleeper hit. The Karma Grip is a handheld attachment to the GoPro camera which provides video stabilization - smooth video. I have not tried this thing, but I can tell you that one of the biggest reasons I have not purchased a camera relates to the shaky video. I thought it would be very cool to get a GoPro and go mountain biking, until I saw some footage of what it really looks like. The video is so shaky that it is not enjoyable to watch. Now, I do not know how well the Karma Grip works, but looking at the quality of the video, I can tell you that I want one to try it out - and I do not even have a GoPro! It is the perfect accessory for existing GoPro owners to improve the quality of their video, and get closer to the professionals. Given the large existing base of GoPro's, even a small proportion of buyers should add meaningful revenue given the price point.

The bears will say that this type of hardware is available for other action cameras (or that you can buy software that does the same thing), but the truth is those brands are no-name Chinese brands. Quick, in 10 seconds name the top 5 action camera brands other than GoPro? That is what I thought. Cheaper, generic Chinese-made cameras are available on Amazon, but GoPro is really playing a different game. GoPro is building a brand, and if you are a bull, you would like to believe the brand has value.

Brands and growth are why companies get bought. Will GoPro go the way of Beats and be acquired by Apple? What, you are skeptical, but didn't other companies make headphones too? It is not always about competition and whether lower priced goods are available. It is about what the brand means to consumers and how they interact with it. That is why those generic products on Amazon are not really competing with GoPro. GoPro has had a series of self inflicted wounds, to be sure, including the most recent with the Karma drone, which suggests that the company needs to beef up its supply chain and technology expertise. But those are addressable issues.

As an investor looking at this stock at the end of December 2016, what is the bull case?

  • Management will fix the drone problems, and even though the drone may not be the best drone on the market, it is a GoPro and it drives incremental revenue growth

  • The Karma Grip becomes a key accessory for anyone who already owns a HERO camera

  • The restructuring announced last quarter right-sizes operating expenses against the revenue growth trajectory

And the bear case:

  • Management cannot get out of its own way, and continues to have issues with the Karma products (both drone and the Grip)

  • Revenue therefore fails to grow at a trajectory to get to escape orbit

  • Operating expenses stay high, and the company needs to raise cash

And external events:

  • Apple buys GoPro to own the video market (who wants to stick their iPhone in the ocean? really?)

  • Garmin, Sony, et al decide to give up on their lame cameras and buys GoPro

So what are the trades?

Buy the Stock, Sell Out of the Money Call Options

GoPro is one of the year's worst performers, having dropped almost 50% year-to-date. Everyone hates the stock, and it has been punished in every conceivable way. More than 30% of the shares are short. By now, the last week of the year, tax loss selling has abated and the year end tax loss selling pressure is almost over. Hasn't everyone who hates the story sold by now?

I like stocks like this, because there exists great opportunity and high risk. Investors will start looking into the new year - GoPro expects to return to profitability in Q4 2016 and in 2017. As an investor, we have to remember that the market's prices today are probabilizing future events - the events of a year ago are a distant memory. GoPro is trading exactly where it should be. Put aside your bias for a minute. Is it worth buying GoPro, one of the most reviled stocks? If you are a bear, you do not own this stock any more. Those investors that have hung in at 9 dollars per share are waiting for good news.

Of course, not every stock that is reviled and punished goes up when the selling is done (see BlackBerry). So buying GoPro could be dead money. But if you believe at all in the bull case, it might be worth a flier (and truly a flier. In no way should GoPro be a core position! If it is, you are either (1) Nick Woodman, the CEO of GoPro, or (2) hopeless). The truth is, money can be made even with stocks that do not go up.

To address the possibility of having GoPro be dead money, if you intend to buy the stock, sell out of the money (OTM) call options against the stock to capture some return while waiting for the stock to get its mojo back. You could do short term, 1-3 months, or give it 6 months with your options. If your stock gets called away, you will end up making some money and that is never a bad thing. If the idea of getting all of your stock called away is not appealing, sell OTM calls against only a portion of your position. If your calls expire out of the money, sell new OTM calls. This is a good way to get some return while you wait for the stock to achieve your thesis. You could buy long in the money calls instead of stock, but this aggressive approach will backfire stupendously if GoPro continues to circle the drain. Owning the common stock, while it does not have the leverage possible from long call options, has the advantage of time. And you don't have to worry about options volatility messing with your position. With the stock, if you get tired of holding the position, sell at the money calls, collect the premium, and go home. If you do it right, the aggregate return from selling calls will give you a modest positive return even if the common stock does nothing.

Sell Out of the Money Puts

This seems to be everyone's favorite strategy and it amazes me that so many books can be written about this one investing approach (I thought about it too, then passed). The idea is to sell cash-secured out of the money puts, and collect the premium as the puts expire. The disclaimer is, "only sell puts on stocks you would like to own!". Because despite what everyone tells you, it is a near certainty that if you sell puts long enough, you will end up getting put the stock. In this case, I would keep the time frame very short, no more than a few weeks to a month, and sell down 10% or so (at 8 dollars per share). If you get put the stock, immediately sell call options against it to recover your investment, in a manner that allows you to either continue reaping the benefit of the calls, or gets you out sooner.

If You Already Own GoPro

We have all had situations like this, so first of all, do not feel badly if you are sitting on an enormous loss on GoPro. There are basically two strategies that make sense to pursue, which can done in parallel (carefully). The greatest value of your position might be the loss you can capture for tax purposes. If you are sitting in a huge hole, lock in some losses - GoPro ain't going back to the glory days of 2014 anytime soon. If you are still positive on the stock and have a stomach for risk, buy more GoPro, wait 31 days, then sell your long held shares at a loss to avoid the wash sale rule. You will have effectively lowered your cost basis and captured a tax loss. This can be very valuable in your portfolio. Next, sell OTM call options, as above. Of course you will be worried about locking in a loss, but you will have lowered the bar by lowering your cost basis. Early in the year, you will want to be mindful about the strike prices and number of contracts sold, to capture value but not risk locking in the loss. As the year progresses, it may become worthwhile to sell ATM or OTM calls to gain the value of the premium and lock in a loss for tax loss selling.

At the end of the day, GoPro may or may not make for a great long-term investment. But it can make for a good stock to trade around. And money can be made whether you are a bull or a bear.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GPRO over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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