The Motley Fool: Focus on GoPro shows more than a Pretty Picture

The Motley Fool Take

Shares of action camera company GoPro (Nasdaq: GPRO) have plunged more than 60 percent over the past year, enough to make this growth stock start looking like more of a value stock.

Part of the problem has been downgrades by Wall Street analysts who have been spooked by the Hero 4 Session camera’s weak initial sales and its rapid price reduction. That’s shortsighted, though, because the company is performing well and has a bright future. Revenue has more than tripled since 2012, while net income rose nearly sixfold, and net profit margins recently hit a solid 10 percent. GoPro also offers a range of cameras from entry-level to advanced, aiming to capture a wide swath of the market.

Overseas revenue has recently been growing at a triple-digit rate, with particular strength in China. GoPro launched a premium content licensing portal earlier this year, and plans to debut a drone in 2016. It’s also looking at virtual-reality films, cloud-based backup services and software as other growth opportunities.

Given GoPro’s brisk growth and its recent and forward-looking price-to-earnings (P/E) ratios respectively in the 20s and teens, the stock is attractively priced and stands a good chance of rewarding patient believers. It’s not a low-risk stock, though, so keep an eye on the company if you buy. (The Motley Fool owns shares of and recommends GoPro.)

Ask the Fool

Irrational Us

Q: Can you explain what behavioral economics is? — T.S., Sacramento, California

A: It’s a very cool mix of psychology and economics that explores how we often don’t act in rational ways. Here’s a great example, from “Why Smart People Make Big Money Mistakes and How to Correct Them” by Gary Belsky and Thomas Gilovich (Simon & Schuster, $16): You see a lamp on sale for $100, but five blocks away, it’s selling for $75. Meanwhile, you spy a dining room set you like with a $1,775 price tag — and it, too, is on sale five blocks away, priced at $1,750. In both scenarios, you stand to save $25. But behavioral economists point out that we’re much more likely to walk the five blocks for the lamp.

This irrationality happens when we invest, too, such as when we leave money in a losing stock in the hope of eventually getting our money back, instead of simply moving the remaining funds to a more promising stock. We also tend to take on much more risk in order to avoid a loss than to achieve a gain. That happens, for example, if we keep buying more shares of a falling stock.

Meanwhile, irrational exuberance has led us into many market bubbles with wildly overpriced stocks. Read more about this fascinating topic in books such as “Predictably Irrational” by Dan Ariely (Harper Perennial, $16).

Q: What’s negative equity? — C.L., Beecher, Michigan

A: It’s an unfortunate phenomenon that befalls homeowners. It happens when you take on a hefty mortgage and then the value of your home drops, so that you owe more than the property is worth. It’s also called an underwater mortgage.

My Dumbest Investment

It was the mid-1990s, and I had my first $3,000 to invest. I wanted to shoot for the moon — or, given this example, perhaps I wanted to shoot for the “Stars.” Everyone around was sporting Hard Rock Cafe shirts from that company’s many exotic and fun locations, so someone came up with a new restaurant concept: Country Star Restaurants, featuring country music singers. At the time, Garth Brooks was tearing it up, and Brooks and Dunn and Alan Jackson were all the rage. Country music was going to take over America, so why not get in on the ground floor? The company soon had a location in Las Vegas, fans flocked to it, and I invested my whole load.

Well, country music soared, but its fans don’t hang out in the middle of urban areas eating overpriced city food. The company filed for bankruptcy protection relatively quickly — and took my entire $3,000 with it. Aargh … lesson learned! — M.C., online

The Fool responds: This is a great example of how a seemingly winning idea can ultimately lose. It reminds us that it’s often best to wait until a company has a proven strategy and is raking in a growing stream of revenue and earnings before we invest. Country Star Restaurants floundered, burned through a lot of cash, went through many auditors and ended up a penny stock.