Ambarella and GoPro are Still Great ShortsGPRO) a fad for quite some time now. Earlier this month, I penned down an article calling GoPro, along with its supplier Ambarella (AMBA), a short. GoPro released its Q3 results this week and it confirmed my analysis.
GoPro’s reported earnings per share of $0.25, falling short of the analysts’ target of $0.29. On the revenue front, GoPro reported sales of $400.3 million, falling short of the consensus target by $33.3 million.
To make matters worse, GoPro has revised its guidance for Q4 downwards.
Due to the terrible earnings report, GoPro’s stock was hammered over 17% in afterhours trading. Consequently, Ambarella’s stock also plummeted 8%. After recording double-digit gains in less than two weeks, investors may be considering covering their short positions. However, I think both Ambarella and GoPro still have massive downside potential. Thus, I think investors should continue shorting both the stocks.
Apart from slashing its guidance, GoPro’s management also sanctioned a $300 million buyback. While longs may consider this as a vote of confidence, I think it signifies that GoPro’s fad is dying faster than the company was expecting. A company in a high-growth phase never spends hundreds of millions of dollar on buybacks and dividends. A big red flag.
The company probably wants to prevent the downfall of its stock by sanctioning such a massive buyback.
Not an acquisition target
After roughly 60% depreciation YTD, GoPro bulls consider the company a prime acquisition candidate. Given Apple’s (AAPL) high-profile acquisition of Beats, longs are hopeful about GoPro’s acquisition.
Not only buying a stock on hopes of acquisition is bad investing, the chances of a company like Apple buying out GoPro are next to zero. It’s highly unlikely that a company would spend over $5 billion on acquiring a moat-less business with a one-hit wonder product. Apple shelled out over $3 billion for Beats because of the company’s valuable music industry contracts and IPs. Hence, in my opinion, considering GoPro and acquisition target doesn’t make sense.
Dropping product prices, slowing growth, and increasing competition are massive headwinds for GoPro. These threats will make it impossible for the company to sustain its present valuation. Moreover, as explained above, the chances of GoPro getting acquired for a premium are extremely slim. Both GoPro and Ambarella still possess massive downside potential. I have a price target of $15 for GoPro and $40 for Ambarella. Investors should hold their short positions as I believe Ambarella and GoPro will continue their downward trajectory.
Published on Oct 30, 2015By Ayush Singh