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Hey, GoPro Inc Investors: Stop Listening to Analysts

By Leo Sun - Oct 19, 2015 at 2:00PM

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Following “professional” price targets on GoPro is a sure way to lose money.

Action camera maker GoPro ( GPRO 0.80% ) was recently walloped by several analyst downgrades. Morgan Stanley cut its price target from $62 to $35, citing weak sales of the HERO4 Session and an expectation that GoPro cameras will remain a "niche alternative" to smartphone videos. Piper Jaffray also cut its price target from $54 to $25, citing weak consumer demand, price cuts, and margin pressure.

Image source: GoPro.

Those downgrades caused shares of GoPro to extend their 60% decline over the past 12 months. But before investors panic and push the sell button, they should take a step back and question how effective analyst price targets actually are.

Follow the Pied Piper
Piper Jaffray's Erinn Murphy probably doesn't want investors to look too closely at her track record with GoPro. Back when the stock traded in the low $50s in late April, Murphy boosted her price target on GoPro from $55 to $66, citing "robust growth for the brand," loyal followings on YouTube and Instagram, and strong top- and bottom-line growth.

In early June, with the stock still in the low $50s, Murphy raised her target on GoPro from $66 to $68 after its supplier Ambarella ( AMBA 14.13% ) posted strong first-quarter earnings and rosy guidance for the second quarter. She reiterated that target after talking to CFO Jack Lazar and President Tony Bates, stating she was "highly confident" in her estimates for the year, believing "they will prove conservative."

GoPro climbed into the low $60s in late July after a solid second quarter, which gave Murphy the confidence to hike her price target again to $72. But after Ambarella reported its second-quarter earnings on Sept. 1, GoPro stock plunged from the mid $40s to the $30s. Investors interpreted Ambarella's muted guidance for the rest of the year as an indicator that GoPro sales were cooling off. But as I previously noted, GoPro actually launched more cameras earlier this year, which skewed year-over-year comparisons. Nonetheless, Murphy hopped on the bandwagon and slashed Piper's price target to $54.

Image source: GoPro.

During all of this madness and speculation, GoPro didn't alter its third-quarter guidance at all. The company still expects 56% annual revenue growth, expanding gross margins, and for the three premium devices (Black, Silver, Session) to account for over 50% of its shipments and revenue. In September, CEO Nick Woodman admitted that the HERO4 Session wasn't selling as well as expected, which prompted the $100 price cut, but he noted that it was merely being cannibalized by the popular Silver. Yet Piper Jaffray, apparently noticing that GoPro's stock had fallen to the high $20s, still slashed its price target to $25.

Buy high, sell low
Wall Street analysts tend to move with the herd, which means they upgrade a stock when it reaches a new high, and downgrade it when it hits a new low. Follow that advice, and you'll likely buy high and sell low.

If you had followed Piper Jaffray's advice and accumulated GoPro shares in the $50s and $60s, you would have bought the stock far too early. A simple look at the fundamentals tells us why.

Between April and July, when Piper was busy boosting its price targets, GoPro traded between 30 to 50 times forward earnings. Today, GoPro trades at just 15 times forward earnings -- a discount to the S&P 500's forward P/E of 17. Furthermore, GoPro now has a 5-year PEG ratio of 0.5, according to Thomson Reuters estimates. A PEG ratio under 1 suggests that a stock could be "undervalued" based on long-term earnings projections. Those ratios are extremely low for a company expected to post double-digit sales and earnings growth over the next two years.

Investors would have made more money shorting the stock while Piper was telling investors to buy. Now that Piper has turned bearish on GoPro, it might be time to do the exact opposite and buy some shares.

The key takeaway
I'm not saying GoPro is a perfect stock. The company needs to reach more mainstream customers, persuade existing users to upgrade, and expand its digital ecosystem. It needs to show investors that future expansion plans in VR and drones can boost its growth beyond stand-alone cameras, and launch a cloud-based platform for easy backups, editing, and sharing.

However, I believe recent analyst moves on GoPro are better contrarian indicators for buying than selling. The stock might go lower, but I believe GoPro's fundamental strengths will eventually shine through and help the stock bounce back toward more reasonable levels. Looking ahead, investors should do their own homework on GoPro, rather than blindly follow the herd-like mentality of Wall Street analysts.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

GoPro, Inc. Stock Quote
GoPro, Inc.
$10.08 (0.80%) $0.08
Morgan Stanley Stock Quote
Morgan Stanley
$95.26 (0.46%) $0.44
Ambarella, Inc. Stock Quote
Ambarella, Inc.
$204.89 (14.13%) $25.37
Piper Sandler Companies Stock Quote
Piper Sandler Companies
$163.39 (-1.42%) $-2.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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