Cash Flow, Drones & VR: 3 Big Reasons to Cover Your GoPro Short

In January, I predicted GoPro was in big trouble.

GoPro (GPRO) makes wearable high-definition cameras. They are often used by surfers, skateboarders and cyclists. Even astronauts use these cameras to take action videos in zero-gravity environments.

I’m actually a huge fan of the company. I bought a GoPro camera earlier this year. And the product is amazing.

However, shares were trading at over 100 times earnings back then. Plus, competition became fierce as some of the largest tech companies in the world spent big money to enter the wearable-camera space.

Since my call, GoPro’s market cap has been cut in half. The stock has significantly underperformed the markets and most tech stocks.

But now …

I suggest you cover your short in GoPro at these levels. In fact, there are several short-term catalysts that could push shares 25% higher or more over the next three months.

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Let me explain why it’s time to exit downside bets against GoPro…

In January, I had just returned from the Consumer Electronics Show (CES) in Las Vegas. That’s one of the largest conferences in the world which featured more than 3,600 exhibitors in over 2.2 million square feet of space this year.

As I made my way through the massive halls, I couldn’t help but notice how many companies were about to start selling similar wearable cameras. I counted at least eight companies including technology heavyweights Sony (SNE), HTC, Toshiba (TOSYY) and Garmin (GRMN).

Apple (AAPL) also announced its entry into the space. In January, the tech giant received a patent to manufacture a similar high-definition wearable camera.

I knew competition in the space would heat up over the next 12 months. Plus, GoPro’s valuation at 145 times earnings was super-expensive given these huge competitive headwinds.

That’s why in January I warned …

"My suggestion is to avoid GoPro. The stock is still expensive after its recent decline. You may see one final bump in shares after the company releases earnings (which includes holiday sales) later this month.

However, I see few catalysts over the next six to 12 months that would drive shares higher. Unless GoPro finds a way to monetize its media platform (which is a long shot in the short term), its shares could fall at least another 40% from current levels."

Today, GoPro is trading at just 15 times forward earnings. Plus, the company is making its way into two of the biggest growth markets in tech: Drones and Virtual Reality. These will be two of the biggest themes at this year’s CES in January.

The consumer drone market is surging. In 2014, consumers spent roughly $600 million to purchase drones. According to consulting firm Radiant Insights, sales are expected to top nearly $5 billion by 2020. That’s 730% growth over the next five years!

Drones are like small helicopters that can be controlled by remote control. They come in all shapes and sizes. GoPro cameras can be attached to these drones to take aerial pictures.

Experts say 2015 will be the ‘Christmas of the Drone’ for consumers

GoPro is also manufacturing its own drones. These units are expected to be priced between $500 and $1,000. I’m sure these products will be on full display during January’s CES.

GoPro is going all-in on virtual reality.

Virtual reality is an artificial world created by computers. By wearing a special headset, you can interact with a seemingly real or physical person in a three-dimensional environment.

This will be (by far) the biggest theme at this year’s CES. Facebook’s Oculus Rift is expected to release their long-awaited virtual reality glasses in February. I sampled this technology last year and was blown away.

Oculus Rift makes virtual reality portable

Virtual reality is expected to grow into a $150 billion market by 2020 according to consulting firm DigiTimes. And GoPro is jumping headfirst into this market with tech giant Google.

Last month, GoPro launched a 16-camera virtual reality rig at Google’s I/O conference. The product (called Odyssey) allows users to take a 360-degree video using enhanced 3D graphics. Odyssey will be used alongside Google’s virtual reality platform (called Jump).

GoPro’s 16-camera Odyssey

The price tag runs about $15,000. But advertisers, news organizations and filmmakers have given the Odyssey rave reviews and some believe this product is a game-changer.

It’s been a rough year for GoPro. However, shares are now trading at a more reasonable valuation following the pullback.

Plus, GoPro is turning into a cash cow. The company generated over $160 million in free cash flow over the past 12 months. GoPro now has over $500 million in net cash on its balance sheet — which will likely be used for buybacks and acquisitions.

GoPro’s new drones and virtual reality cameras will be on display at January’s CES. The buzz from these products alone could push shares sharply higher from these depressed levels.

Longer term, the company is focusing more on drones and virtual reality. These are two huge growth markets that could turn into big revenue streams for the company over the next few years.

Good investing,

Frank Curzio