Source: GoPro
Talk about a wipeout!
Last week, the U.S. Patent and Trademark Office reassigned a patent to Apple (AAPL +3.26%) detailing a "Digital Camera System Having Remote Control." The patent was part of Kodak's old intellectual property portfolio that it sold off at the end of 2012 after filing for bankruptcy protection. Apple bought some of those patents. As a result of the refiling and some mentions of GoPro (GPRO +4.85%) products within the patent used for background information, shares of GoPro tanked on fears that Apple may plan to enter the action cam market.
This is an excellent example of how the market can act irrationally. GoPro shares declined over 12% on Tuesday, Jan. 13, the day the story came out. By market close on Friday, Jan. 16, GoPro shares were down 16% from Monday's close. All of this and nothing has really changed.
Here's a secret. Apple doesn't use most of its patents.
Apple files a lot of patents. Apple's decision to reassign a patent it purchased from Kodak doesn't indicate its intention to create a product using it.
If Apple does use the patent, it wouldn't make sense for Apple to enter the action camera market. Apple is really good at selling devices that use its closed software ecosystem. There's hardly any software on an action camera, and there's no need for any additional onboard software. It's far easier to edit footage on a computer, and GoPro already lets users use their smartphone as a viewfinder.
If anything, Apple would likely use the patent to connect the iPhone -- one of the most popular cameras in the world -- to a remote device like the Apple Watch. This patent would give Apple the option to allow competitors like Samsung to license the feature or, more likely, force them to work around the patent, so even if it doesn't actually implement that system, Apple could use it against competitors.
Apple's newly assigned patent doesn't look to be a huge threat to GoPro's business, but that didn't stop investors from panicking when the news came out.
Is GoPro really that easy to defeat?
The trading action in GoPro on Tuesday says a lot about the people investing in GoPro, and less about GoPro itself.
GoPro has built a brand so strong it's the Kleenex of action cams -- i.e. people refer to action cams as "GoPros." It has 42% market share in action cameras, according to some estimates.
While a big consumer electronics company entering the market could disrupt sales and take market share, it hasn't yet. Sony makes action cams and it still only has an 8% share of the market. GoPro's brand and its media content provide a wide moat competitors must cross before its business is threatened.
But GoPro's stock has been on a roller-coaster ride suitable for its cameras. Shares have been extremely volatile, with its price swinging by more than 5% more than one-third of its active trading days in 2013. That volatility is a green-light for swing traders and scalpers to pile into the stock to take advantage of relatively small changes in price. Over the past 52 weeks, GoPro's stock has swung between $98.47 and $28.65, according to S&P Capital IQ data.
Traders are significantly more susceptible to headlines than Foolish investors focused on investing in strong companies for the long term. So, when a headline says Apple might challenge GoPro, those traders sell their shares and find something else.
Be greedy when others are fearful
Tuesday was an excellent chance to be "greedy when others are fearful" as Warren Buffett once said. With GoPro shares still trading well below where they were at the beginning of last week, the opportunity is still there.
GoPro trades for a relatively high valuation for a consumer electronics company. Its forward P/E ratio of 41.5 is still well above the industry average. However, analysts expect revenue and earnings to continue growing, projecting 35% earnings growth over the next five years, which justifies its higher earnings multiple.
Buffett also said "If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes."
If you're of the opinion that an entry from Apple or another large consumer electronics company could knock GoPro off its spot at the top of action camera makers, then you may be better off looking elsewhere for an investment. On the other hand, if you think GoPro will remain the leading manufacturer of a growing industry while leveraging its media property into a second revenue stream, GoPro is worth buying at these levels.
