GoPro Crushed Earnings but Stock Crashes

Yesterday GoPro (NASDAQ: GPRO), maker of wearable high-definition cameras, reported that its fourth-quarter profit surged 150% from a year earlier to $173.7 million, while revenue jumped 75% to $633.9 million. Meanwhile, its profit margin rose from 41.9% to 47.9% in the quarter.
Simply put, GoPro crushed earnings.
But something strange happened after GoPro announced its best quarter ever – the stock fell more than 15% in after hours trading. What gives?
First, a little history.
GoPro made its stock market debut last summer following much anticipation and fanfare. After opening at $24 per share, the stock jumped 30% during its first day of trading.
After the GoPro IPO the stock went on an absolute tear, topping out in October 2014 at $98.47. At its high, the stock was up more than 300% since its IPO just three and a half months earlier.
Yesterday the stock closed at $54.37, up around 125% since its IPO but down around 45% from its October high. Even though the stock has fallen so dramatically since October it still trades at a price-to-earnings ratio (P/E) of around 200. By comparison, the average P/E for the S&P 500 currently sits around 19.5.
The last few months have been nothing short of a roller coaster ride for GoPro investors.
Not surprisingly, as expectations for the company rose higher and higher they also became more difficult to exceed. As is often the case for momentum stocks with high valuations, even a strong earnings report can sometimes lead to a huge drop in the stock’s price if it fails to please investors that are expecting nothing but perfection.
With this in mind, let’s take a closer look at GoPro’s quarter.
Did GoPro report strong results?
Absolutely. GoPro achieved year-over-year revenue growth of 75%, a surge in profit of more than 150% and boosted its margins by around 14%.
Did GoPro fail to live up to expectations?
Sort of. Wall Street analysts were expecting the company to report non-GAAP earnings per share – EPS – of $0.70. This was a lofty number considering that the company reported EPS of $0.12 in the fourth quarter of 2013. GoPro’s actual results came in at $0.99 per share, more than 40% higher than analyst expectations.
Why did the stock fall 15% after GoPro crushed earnings?
In my opinion, the primary reason for GoPro’s beating in after hours trading is that investors are waking up to the fact that the company’s valuation is outrageous. With a P/E of around 200 and a forward P/E of around 40, the stock is simply too expensive.
By comparison, Apple trades at a P/E of around 16 and a forward P/E of around 13.
The company also announced yesterday that its chief operating officer had tendered her resignation a few days prior. The COO will depart at the end of February.
Most of the headlines I’ve read about the GoPro earnings report and subsequent stock crash point to the COO’s resignation as a primary reason behind the stock’s behavior. I’m not convinced.
I think investors are waking up to the reality of GoPro’s slowing growth and sky-high valuation.
GoPro’s revenue growth, while still impressive, is clearly slowing:

  • 260% increase between 2010 and 2011.
  • 125% increase between 2011 and 2012.
  • 90% increase between 2012 and 2013.
  • 41% increase between 2013 and 2014.

There are also very valid concerns among investors that other companies could easily mimic GoPro’s small, high-definition and durable cameras. News broke in January of a patent filed by Apple (NASDAQ: AAPL) suggesting that it could enter the action-camera space.
From my perspective, this stock has been too expensive to touch since its IPO, even as it kept rising higher and higher. Despite the fact that GoPro crushed earnings – and not just by a little bit – the stock was punished during after hours trading for good reason. If that’s not a wake-up call for investors then I don’t know what is.
DISCLOSURE: I personally own shares of Apple.

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