GoPro Inc Volatility Presents Opportunity: JPM

Updated on

GoPro stock has been bouncing around recently as the company prepares for the launches of its Karma drone and Hero 5 camera. Both are expected sometime in the third quarter, and analysts at JPMorgan suggest that investors who don’t mind a little volatility might consider capturing it with an options purchase.

GoPro Hero 5, Karma expected soon

Analysts Bram Kaplan and Mark Kolanovic suggest that investors buy the volatility in GoPro before the Hero 5 and Karma launches by snapping up the October 16c / 14p strangle. In other words, the 16 strike call and the 14 strike put. The net cost of the strangle as of the writing of their report was $2.11, which was a $15.12 ref price.

They expect the Hero 5 launch to be a “high-impact stock moving event.” They note that no official launch date for either the Karma or the Hero 5 has been released, but they expect GoPro to unveil both products or at least the Hero 5, which they view as the most important of the two, in early October. As a reference point, the company unveiled the Hero 4 camera on October 5, 2014.

GoPro needs a more differentiated product

The JPMorgan team pointed out that not many details about the Karma have been released yet, so Wall Street is not yet incorporating the drone into its models. If it is priced correctly and has a “broad distribution announcement,” they believe it could be a “sleeper product” because it could push Street estimates much higher.

GoPro currently gets about 95% of its revenues from camera products, so they note that it’s very important for the company to release a “more interactive and differentiated product” rather than just another camera. They add that investors have become highly skeptical on the company as short interest has climbed to about 37% of outstanding shares. Such a high level of short interest could trigger a squeeze or “accentuate any upside move” in GoPro stock if the Karma and/ or Hero 5 launches end up being “impressive.”

On the other hand, a bad launch could result in “material downside” because of how dependent the company is on its cameras. Their colleague Paul Coster has an Overweight rating and $16 price target on GoPro stock, although he also sees a risk related to selling the news about the Hero 5 launch.

Riding the volatility in GoPro

On Monday alone, GoPro stock rose sharply at the open, closing in on $16 per share before tumbling throughout the rest of the day. Kaplan and Kolanovic say that implied volatility in GoPro stock looks “relatively cheap” even though the launch of the Hero 5 is likely to be so high-impact. They said the current 2M implied volatility is close to its seventh percentile over the last year and lower than the 2M realized volatility by about four points.

They add that breakeven on the strangle they suggested above look to be wide in terms of percentages because of GoPro’s high absolute volatility but narrow compared to the stock’s price action over the last one or two years.

Leave a Comment