A GoPro Earnings Play for Potentially Triple-Digit GainsGPRO) rallied over 10% just a few days ago. While there was no news or tailwind driving the rally, I think it has opened up a good shorting opportunity going into earnings. Investors can make the use of the recent rally to open up a short position as GoPro’s earnings are likely to disappoint. Here is why I think GoPro’s earnings will come in weak this quarter.
Weak earnings will push the stock lower
GoPro is expected to release its Q2 earnings towards the end of July or in the first week of August.
GoPro’s revenue for Q1 came in at just $183 million, and to reach the bottom-end of its revenue guidance for 2016, GoPro will have to generate sales of about $400 million for every quarter in 2016.
Given that GoPro’s sales have been in a downtrend, it will be nearly impossible for the stock to deliver on its FY2016 guidance. The delayed launch of Karma and the weak performance of the Hero 5 make it impossible for GoPro to deliver on its guidance.
Hence, going forward, investors can expect GoPro to slash its revenue guidance in either the upcoming quarter, or in the next quarter. I personally think GoPro will have to guide lower in the next quarter as the market will not believe it can make up for the lost sales and generate enough sales in the next two quarter to reach its target.
Thus, I think investors should short GoPro heading into earnings. In fact, investors can also consider buying put options with $12 strike price. A slashed guidance should see the stock fall to roughly $10, thereby leading to a roughly triple-digit gain.
It is obvious that GoPro will likely report a weak quarter. There is no way GoPro can generate $1.2 billion in sales in three quarters, given the recent weakness. Even if the company beats estimates this quarter, investors will by eyeing the company’s guidance for the remainder of fiscal 2016. And as mentioned above, the chances of GoPro slashing its guidance are really high.
Hence, I think investors should bet against GoPro heading into earnings. I think buying put options would be the best way for investors to maximize their profits.
Disclosure: No Position
Published on Jul 15, 2016By Ayush Singh