Can You Picture a Stock Coming Back From the Dead?

Can we bring ‘”dead money” back to life? I think I’ve got a trade that could.

I’m looking at GoPro (GRPO)  as dead money in the coming quarters, as I expect this equity to trade mostly sideways, while the company slowly transitions to a new business model. But with the right simple option strategy, one can set up a trade that offers an acceptable return even if the shares have a slow decline into early summer.

GoPro reached iconic status a decade ago. But the fast-improving camera capabilities on smartphones undermined its sales growth to a large extent, which caused the stock to implode and destroyed vast troves of shareholder value. But the shares have found an apparent floor around current trading levels in recent years.

Most importantly, sales have stabilized as well at around $1.1 billion annually. The stock has a current market capitalization of approximately $875 million. GoPro is best known for its line of HERO cameras; current offers include HERO9 Black, HERO10 Black, and HERO11 Black and the 360-degree GoPro MAX. There cost from between $349.99 and $549.99. They are durable, high-resolution, waterproof, very stable camcorders designed with the sportsman in mind and are complemented by accessories that allow the adventurer to strap the camera to her head or other body part while riding a wave or skydiving. HERO10 is the top-selling camcorder in terms of unit sales in the U.S. marketplace.

Equipment sales still make up just over 90% of overall sales, but GoPro is slowly growing its subscription services, which eventually should produce higher overall margins for the company. As of the end of the third quarter, the company serviced 2.08 million GoPro.com subscribers, representing a 55% increase from the same period a year ago and translating to around $100 million in high-margin (70%-80%) annual recurring revenue.

The analyst community has the company earning roughly 45 cents a share on $1.1 billion sales for both fiscal 2022 and fiscal 2023. That puts the stock’s valuation at around 12 times profits. That gets significantly cheaper if one equates for the approximate $200 million in net cash on the company’s balance sheet. I expect the shares to trade flat much like revenues and earnings over the next few quarters as the company’s subscription model builds momentum.

Option Strategy:

Here is my “Dead Money” covered call trade around GPRO. Using the July $5 call strikes, fashion a covered call order with a net debit in the $4.40 to $4.50 range (net stock price – option premium). This strategy provides downside protection of approximately 20%. It also provides a return in the low teens even if the stock falls 10% during the option duration. If the shares remain rangebound, GPRO could turn out to be a solid “rinse, wash and repeat” covered call idea.