Shares of action digital video camera maker GoPro (NASDAQ: GPRO) have hit the wall.
After peaking near $100 per share, the momentum has faded, bumping up against the reality of competition, negative press, and the inevitable turning of Wall Street.
It’s hard to say just how a stock like GoPro should be valued. Frankly, all momentum is rather arbitrary.
Determining when the music stops or simply pauses is the difference between hitting the home run and striking out.
In the case of GoPro it would seem that the forces lining up against shares today are rather temporary and arbitrary.
Let’s start with competition.
HTC made a big splash last week indicating that it would begin selling an action camera similar to GoPro. Smartphone sales are declining, thus it would be a natural response to focus on something GoPro has done very well.
But, good luck with that. GoPro has a dominant position being first in the space. That first-mover advantage especially in technology is incredibly valuable.
While the threat of competition may be disconcerting, I doubt HTC’s product will have a meaningful impact on the growth of GoPro.
What about negative PR?
On Monday shares of GoPro sank as the camera was linked to the skiing accident of Formula 1 racer Michael Schumacher.
Apparently Schumacher had the camera attached to his helmet. While that helmet split in two, the rugged GoPro was intact.
It’s an easy stretch to think such a device may not be such a good idea, especially when accidents happen. That said, the company readily discloses the risks and one accident will not likely have a meaningful impact on the future.
In other words, this too shall pass and whatever selling took place on that news is an opportunity to buy shares.
Finally the abandonment of Wall Street might be disturbing, but all part of the game. Momentum stocks in particular are easy targets for analysts to pontificate on.
First up was Piper Jaffray analyst Sean Naughton, who cut his rating on GoPro to Neutral last week.
Seemingly arbitrarily, Naughton determined that GoPro’s valuation had gotten too rich. The concern, as always, is that a premium valuation leaves little room for upside.
At the same time Piper Jaffray notes how favorable GoPro is in a survey of teens. It appears to be the go-to gift for the upcoming holiday season.
Even though Naughton downgraded the stock, he is bullish.
Now does that make any sense?
It really doesn’t, and you can almost see Naughton’s angst.
As an analyst, Naughton is probably grounded in fundamental valuation, thus a high price paid today makes it difficult to see the upside.
But momentum stocks tend to have no basis in fundamentals.
If indeed GoPro is the go-to gift, you could see lots of upside from here.
To be fair, Naughton seems to have nailed in as shares of GoPro have sunk since.
As such, it seems to be a good time to be a buyer before the market realizes just how big GoPro will become.