The Adrenaline-Pumping Ride of GoPro's IPO

DCIM\142GOPRO
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If a thrill-seeking mountain biker wants to take on some choppy terrain, it might not be a bad idea to ride GoPro's (GPRO) stock chart. One of the market's most volatile stocks is the maker of wearable cameras that extreme sporting enthusiasts -- like our mountain biker here -- don to record their feats of fancy.

It's been a tale of two quarters for GoPro in its first six months as a public company. GoPro went public at $24 in late June, soaring in subsequent weeks. It peaked in early October, more than quadrupling to hit $98.47. It has gone on to shed more than 40 percent of its value.

The wild swings aren't a surprise. GoPro went public with plenty of hype this summer, and valuation concerns were bound to come up after it roared out of the gate. Why was GoPro so hot six months ago? Why has it been so cold this quarter? Let's take a look at the two sides of the GoPro mania.

Meet the Hot IPO of 2014

It's easy to see why investors gravitated toward GoPro. We've all seen those breathtaking helmet-mounted high-def videos of skateboarders, skiers and hang gliders, and GoPro is the wearable camera of choice for adrenaline junkies like these.

GoPro came to market with the speed of some of its action videos. Revenue more than doubled in 2012, and nearly did so again in 2013 when its top line soared 87 percent to hit $985.7 million. Earnings and operating profits were also on a tear.

Another thing that helped GoPro was that it more than lived up to the hype. It posted better-than-expected earnings in its first two quarterly reports as a public company, and first impressions for Wall Street debutantes linger.

Investors sometimes stay away from hardware plays, especially in a cutthroat market like video cameras. However, GoPro made it clear at the time of its IPO that its grander goal was to become a media company. It wanted to tap into the growing content created by GoPro users to create a social video platform of its own. It went on to hire Guggenheim Digital Media executive Zander Lurie in November to lead its media division.

GoPro was rolling along nicely, but then Mr. Market realized that the stock was growing faster than its decelerating top-line growth.

The Wipeout Will Be Televised

Valuations matter. At its peak during the first week of October, the stock was trading at nearly 100 times this year's earnings and nearly 80 times next year's profit target. That wouldn't be so rich if the stock was still huffing and puffing at last year's pace, but GoPro's starting to prove mortal.

Analysts see GoPro's revenue climbing 36 percent this year, followed by a 24 percent top-line spurt next year. That's the kind of growth that most companies would love to brandish, but it's a more sobering proposition when you're trading at GoPro's multiples.

10 Million Shorted Shares

Then there are also folks who are skeptical about its media strategy. Will GoPro's push to become a content hub succeed when GoPro users are perfectly fine uploading their clips on Vimeo or Google's (GOOG) (GOOGL) YouTube? As strong as the GoPro brand may be, is it enough to offset the success of established video-sharing sites and the monetization options for original content on YouTube?

There's no shortage of skeptics, and that includes speculators who have shorted more than 10 million shares of GoPro. That's not necessarily a bad thing, especially if a positive development forces them to cover their positions.

GoPro investors who got in at the June IPO price aren't complaining. The stock has gone on to more than double despite the swings. Unlike at many companies, where only well-heeled investors get in on a stock's debut, GoPro was considerate enough to its fans to allocate a block of the IPO for individual investors. A strong holiday season could make GoPro a winner in its third quarter as a public company, but the valuation concerns may also end up having the last laugh.

Just hit the record button and play along.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Google (A and C shares) and GoPro. The Motley Fool owns shares of Google (A and C shares). Try any of our Foolish newsletter services free for 30 days.
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