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GoPro ($GPRO) – Still Overvalued, or Resuming the Uptrend?

Seeing a GoPro ($GPRO) action camera affixed to the hood of a cab on Madison Avenue last week, we were reminded of the old Wall Street adage that says once you hear about a stock in a New York taxi, it’s probably time to sell it. it got us thinking about whether the same goes for$GPRO.

Shareholders of $GPRO have done extraordinarily well since the company’s IPO in on June 24th, with the stock tripling to a high over $98 earlier this month. And there is no doubt that the company’s products have completely revolutionized the video camera market, creating an entirely new genre of media in the process.

However, the stock’s rapid rise to an extremely high price also meant an extremely high valuation, leaving it very vulnerable to any shift in sentiment. Accordingly, the general correction that roiled the stock market earlier this month hit $GPRO right between the eyes, slicing a whopping 34% off the stock in two weeks. Yesterday, the company recovered over 6% to end back near $70, the result of a Wedbush recommendation, short-covering, and probably more than a little bottom fishing ahead of third-quarter earnings from folks who were justifiably hesitant to buy the stock at its prior heights.

The question facing investors now is simple. Is $GPRO’s correction a chance to get a rapidly-growing company on sale, or is it the first step in a series of saw-tooth moves back down to more reasonable valuations?

Is it a good company at a bad price, or a great company at low price?

The answer is not so simple. There is no doubt that $GPRO’s business is impressive, boasting 38% quarter-over-quarter revenue growth, a dominant market position, a strong business model and a very loyal, young and enthusiastic customer base bent on recording (and sharing) their most death-defying activities from every conceivable angle. Moreover, $GPRO has become a Wall Street darling, a characteristic which can never be underestimated when analyzing whether a stock’s valuation is justified. Indeed, until the recent slide, shares of the company had been notoriously difficult to borrow in order to short, setting up squeezes throughout the fall and enhancing the company’s reputation as a momentum play. Potential monetization of the company’s content, which is consumed by far more people than actual owners of the cameras, has believers dreaming of significant future revenue streams.

On the other hand, at the moment GoPro makes cameras. It makes innovative, high quality, mobile cameras, and has carved out an enviable niche in an otherwise staid industry, but at the end of the day, it is still a camera company. It’s not a lifestyle company, despite the marketing, nor is it (yet) a media company. Significant competition is inevitable, and if this year’s CES is any guide, it will come from the likes of Nikon and Canon ($CAJ). Even assuming $GPRO hits the average 2015 EPS estimate of $1, the stock is still trading for a whopping 70x earnings, 8x sales, 126x book value and a PEG ratio of over 3. It’s super expensive by any measure you care to use. At the same time, a large amount of restricted stock owned by insiders at the time of the IPO will unlock at the end of December, potentially sending a wall of supply into the market during the critical holiday sales season.

$GRPO is among the most-watched stocks on vetr.com, with 23 active ratings and 51 followers. Interestingly, the ratings are almost exactly split down the middle between buy and sell ratings, perhaps in keeping with the debate currently raging about the stock’s prospects. For old hands in this business, $GPRO is undoubtedly reminiscent of the internet darlings that rose day in and day out during the technology bubble, only to crash downwards once overall market sentiment soured. One of the lessons from that era, however, is that most bona-fide businesses – $CSCO,$AMZN$AAPL, etc. – survived to fight another day.

What do you think? Is $GPRO headed lower as price catches up with valuation, or will the stock’s momentum return backed by rapid growth and future revenue potential? Make a rating!

Disclosure: At the time of this writing, Vetr had no position in the equities mentioned in this report.