Is GoPro a Contrarian Buy?

Shares of GoPro (GPRO) have fallen from grace in the last few months. GoPro’s successful IPO has turned bitter in a span of a few months as the stock is currently trading about 40% lower than its IPO valuation. While I was bearish of GoPro’s valuation when it was trading above $50, I think the stock has fallen to a very cheap valuation. Although many analyst firms have turned bearish on the stock, I think there is a great opportunity for contrarian investors to buy the stock.

Given the recent plunge, and the fact that the Street hates the stock, I think GoPro is a great contrarian pick primarily because I think the stock has fallen so low that it may tempt various tech giants into buying the company for a hefty premium.

Why GoPro is an Acquisition Candidate

Although GoPro doesn’t have a diversified business model, the company manufactures great products that have enabled it to establish a great brand.
Bearing in mind that GoPro has the maximum market share, it can be considered as an acquisition candidate by many tech giants. Since Apple has paid over $3 billion, I think it is very likely that it, or other companies like Google, may offer to buyout GoPro so as to gain the competitive edge in a growing market.

Multiple downgrades over the last few weeks, and a bad quarterly report have pushed GoPro’s stock downwards. And, in my opinion, the massive plunge can fuel a buyout due to GoPro’s cheap valuation.

Buyback

GoPro’s management also believes that the company is trading at a discount as it recently sanctioned a $300 million buyback program. Although it is rare for a growing company to spend millions of dollars on buyback, the sanctioning shows that the management believes in the undervaluation of the stock. Given the undervaluation, I think a buyout in the near future is likely, which is why I think GoPro is a good speculative play.

Conclusion

GoPro has a P/S ratio of 1.4 and is trading at 15x trailing earnings. No matter how you look at it, GoPro is undervalued. The stock is definitely cheap given the value of the company’s brand and its position as a market leader. Given the undervaluation of the stock, I think a buyout is likely in the near future. And since the Street is almost completely bearish on the stock right now, I think GoPro is a great contrarian buy.
Published on Dec 31, 2015
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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