Rumors are swirling that activist investor Carl Icahn is acquiring a stake in action camera maker GoPro (NASDAQ:GPRO). Call option activity for the stock has surged to five times that of puts, indicating that investors are anticipating a big rally.

GoPro is also one of the most shorted stocks on the market at 55% of float. That makes the company a strong candidate for a "short squeeze" where short sellers scramble to buy back shares and cause the stock to rally.

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GoPro entry-level HERO. Source: GoPro

Shares have fallen over 45% in the past six months due to concerns about lockup expirations, low-end competition, future plans, and the high valuation.

GoPro still trades at 31 times expected 2015 earnings, according to estimates from S&P Capital IQ, making it much pricier than other camera makers like Canon or Nikon. However, investors should recall that GoPro finished its first day of trading last June with a whopping price-to-earnings of 80 times. Could the downside for this stock be limited enough to attract a heavyweight investor like Icahn?

How Icahn could help GoPro
Carl Icahn is known for taking big stakes in companies and forcing them to implement changes. Last year, he pressured eBay to spin off PayPal, which the company agreed to do last September. He recently convinced crane manufacturer Manitowoc Company to spin off its food service division and pushed Apple to boost its stock buybacks.

GoPro might benefit from some aggressive guidance. Its defensive moat is not wide enough to thwart low-end competitors. Last year, the company responded to those rivals with the $129 HERO, but newer challengers like Xiaomi have already undercut the HERO with an even lower price tag and beefier specs.

Plans for international expansion are also unclear. At CES 2015, CEO Nick Woodman stated that GoPro would expand to China this year. However, CFO Jack Lazar told Citigroup that overseas expansion plans could take longer than anticipated. Lastly, plans for media expansion and rumored consumer drone plans might not effectively reduce its dependence on action cameras.

If Icahn buys a substantial stake in GoPro, he could push it to invest in smaller companies like Nixie or Airdroids to shore up its defenses. Icahn could also pressure the company to sign a contract manufacturing deal with minority stake owner Foxconn, which would bolster its manufacturing capabilities. Icahn could even push GoPro to sell itself to long-rumored suitors like Apple, Amazon, or Sony.

How Icahn could harm GoPro
However, Icahn could also harm GoPro with misguided tech advice and lofty promises. Last October, he strongly urged Apple to develop 55-inch to 64-inch 4K smart UHD TVs. He boldly claimed that Apple could sell 12 million 4K TVs in fiscal 2016 and 25 million units in 2017 at an average price of $1,500. Yet Icahn neglected the fact that 4K TVs have already become highly commoditized, low-margin devices.

Icahn is also notorious for promoting his own positions via tweets and open letters with headline-grabbing price targets. In February, Icahn boldly claimed that Apple had a "fair value" of $216 per share, which would give it a whopping market cap of $1.3 trillion.

GoPro is already a fairly volatile stock which trades more on headlines than fundamentals. Therefore, if Icahn starts making big promises and slapping lofty price targets on the shares, investors could be pulled along on a wild ride.

Let's not get ahead of ourselves yet
It is interesting to weigh the pros and cons of Icahn's involvement in GoPro, but investors should remember that it is only rumored at this point. If the news is valid, his stake in the company will soon be disclosed in a 13-F SEC filing. If that stake is revealed, a big short squeeze will likely follow and help GoPro shares bounce back.

 

Leo Sun owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, eBay, and GoPro. The Motley Fool owns shares of Amazon.com, Apple, Citigroup Inc, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.