In our SMBU Daily Video, Mike Bellafiore takes a look at GoPro and possible next trades.

Welcome to the SMB video – how to trade GoPro. So GoPro reported yesterday and we’ve been watching it very closely over the last two days. I’m sure some of you sitting there at home are wondering whether or not to sell it, whether or not you should buy it, whether or not you should add to your position. Let’s see if we can offer a little bit of guidance for you.

So GoPro reported yesterday and its numbers were not very good. Sales of their new capture device were lighter than anticipated. Their Hero 4 session product is not doing as well as they would have liked. The numbers are coming in light. For Q4 their revenues missed significantly –  that’s not a report you want to see and particularly for something that may be considered a growth company. So they are missing on a lot of numbers.

One of our traders in our AM sheet pointed out something very instructive for whether or not this stock is going to trade higher or lower and that’s inventories. Their inventories are up a hundred and forty-seven percent with slow sales growth. That means that they have a lot of product that they have move before they start to see the numbers get better. We don’t want to see companies with lots of inventory that’s building up and that’s what you’re seeing with GoPro.

Let’s take a step back as we try to answer the question of whether or not we should get long GoPro or if there’s a trade from here and take a look at GoPro and its move from $100 down to $25. I think it’s important to go over the challenges that they’ve seen so in October of 2014. You start to see overall weakness in the market as well as concerns about overvaluation which were major reasons why you saw GoPro move from $100 down to $75. It had over valuation issues and a 25% pull-in.

Then November 2014 you had GoPro filing a secondary offering for 800 million. Their CEO said that he was going to sell some of his shares as well. In December 2014 the IPO lock-up expires so that means there is new stock brought to market – there’s more supply to sell which causes the stock to head down from the mid-70s. Then we get January 2015 – Apple was granted a patent to enter the action camera space which adds competition for GoPro. There’s a very large brand that’s potentially competing in their space. In February 2015 earnings were better than expected but weak guidance due to growing costs from the company cutting their outlook for Q 1 for 2015. Then in September of 2015 Zacks rates the stock an F and the agency expects momentum  stocks like GoPro to be hit hardest during market downturns. Also we saw a Barrons negative article in the name.

That’s a little bit of a history lesson as to why we’re off from a $100 and now we’re into $25. We have that bad report and what are we seeing on our charts in the near term. What are some trades you might be able to make if you’re a retail trader or swing trader or even a short-term trader in this?

Day one we saw tremendous support at this 25.05 level, it couldn’t trade below there. Held that level very nicely. Had a nice strong up move up to 26.00. On our charts we’re seeing 26 area as resistance. We’re seeing 25.65 as another very significant level. That’s where most of the volume was done on day one. It held that level again – we’re getting 25.05 as support, we’re seeing 25.65 as resistance, and we’re seeing 26 as resistance.

So fundamentally we want to see GoPro start to shave off some of its inventory. Fundamentally we want to see its new products start to gain some traction. Fundamentally we want to hear things like Apple is not doing as well as they would have liked in the wearable camera space.

You want to see a news catalyst come into this name for those of you thinking about getting long GoPro. Here are a couple ideas for you to consider. 25 is an interesting area think about trading this on the long side with stops below there depending on how you trade. If the stock closes above 26 getting long for a swing trade is an idea to consider. Buying calls here from this 25 area whether or not you by 26, 27, 28 that’s up to your trading style. The best thing is to marry and nice news catalyst and improvement in their fundamentals with price. These are the most important prices and if you’re a short trader if the stocks gets below 25 it should go find a new level it should have to go find support. That’s what we’re seeing in GoPro. Those are the important metrics to be thinking about. How are they gonna be doing on new products? Can they shave off some of their inventory? Can they block apple and certain new competitors from gaining market share? Those are their challenges. I think this is an interesting set up – certainly a trade decision for lots of you.

* no relevant positions