Wednesday, October 29, 2014

* GoPro (GPRO) - Earnings Preview: What Will Surprise You and Where the Risk Lies

Share on StockTwits

This visualization is provided by:
Make These Visualizations Yourself: Free Trial

GPRO is trading $66.55, down 4.0% with IV30™ up 5.2%. The Symbol Summary is included below.

Provided by Livevol

GPRO has earnings due out tomorrow (Oct. 30th after the market closes) and the stock is up over 50% since IPO (closing of day one trading).  The firm is much larger than many people know, with revenue in the trailing-twelve-months now reaching over $1B.  The firm also is profitable, and has been for some time.

The stock (not the company) has found a life of its own -- with essentially an incomparable P/E ratio of over 200 which is unlike any peer.  Further, while the firm has substantial revenue, the growth has certainly been attractive, but not "MOMO-rrific."  The greatest risk to GPRO for this earnings release, IMHO, is the perfection priced into the stock.  A miss of any sort, either in the realized quarter or the future outlook could cause a spasm in the stock down.

The stock is also hard to borrow (I see -50% or more on the street), so a surprise to the upside could cause a spasm in the stock - upwards.

Let's take a look.

The all-time stock chart return is included below.

Provided by Livevol

We can see the meteoric rise is the stock price to nearly a 120% gain in a matter of months, and the rather abrupt sell-off in a matter of several weeks.  Note the blue "E" icon represents the last earnings release, and the stock dipped and stayed down for a while, before it ripped back up again.  This is our only data point for an earnings release for GPRO as a public company.

Before we look at risk as priced by the option market, let's turn to the fundamental measures driving the firm.

Revenue (TTM)
GPRO went public with ~$860M in revenue for the trialing-twelve-months and has grown to now over $1B.  That's very nice growth, but it's not the meteoric "hair on fire" growth we see in some MOMOs.  Then again, the starting value of over $850M is much higher than the rest of the MOMOs when they go public.  Love it or hate it, GPRO has a real business

Revenue (TTM) vs. Gross Margin %
This is a great chart for GPRO.  The bars are revenue and the red line is the gross margin %.  As the firm is growing revenue, it continues to grow gross margin%, which is not a trivial accomplishment.

Revenue (TTM) vs. Net Income (TTM)
The bars are revenue (again) and the red line is net income.  The trend for earnings is obviously down, but I do note, quite importantly, that the net income numbers are minuscule relative to revenue, so I wouldn't let  hat trend drive too much of an opinion on the stock.  Those are small numbers.

Research & Development per Dollar of Revenue
We can see that GPRO has remained committed to R&D and is now spending over $0.10 of every dollar in revenue on R&D, up from $0.07 when the firm went pubic.  This is a good sign for those that believe in the capability of management to deliver on their operational plans.

Revenue vs. Gross Margin % vs. Peers
It's pretty hard to find a relevant peer group for GPRO, but here's a stab at it.  In any case, we can see the firm is small relative to revenue (the x-axis) but is in right about the middle relative to gross margin % (the y-axis).

Valuation Relative to Earnings
So here's where I see the greatest risk.  On the y-axis GPRO is trading at a 210 P/E ratio as of today (and ~150 as of the firm's last quarterly filing), while the firm's net income (x-axis) is the smallest.

The small net income to high P/E makes sense.  What doesn't make complete sense to me is the high P/E relative to earnings (and revenue) growth.  Now, that net income number could pop huge relative to the current $35M with a just a tiny bit of margin improvement given how large revenue is, so that's... ya know... good.  But.. the firm is also trading at a Price/Sales of 8.5, which it ain't cheap either.  Just be aware of the valuation and the implication that it has on the expected future growth i.e. a lot.

Now let's turn to the risk per the option market (the IV30™ chart is in isolation, below).

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement.  The blue "E" icon represents earnings, and that was the peak of "risk" for GPRO.  That's normal.  We can also see risk rising into this earnings release... this is also normal.

The fact that the risk into this earnings release will end being "similar" to the last is a reflection that there are still a great deal of unknowns with respect to this entity as a brand new public company.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$59, $74] by the end of trading on October 31st.

Using the monthly options we see a price range of [$54.50, $78.50] by the end of trading on Nov. 21st.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.

No comments:

Post a Comment