GoPro Goes Berserk

We all have a tendency to place a greater value on what is not readily available to us.

In the stock market, the aforesaid comment is reflected in the everyday disparity between supply and demand. Supply represents the number of shares available in the open market and those willing to sell, whereas demand represents the number of buyers at any given price.

When a stock is in high demand, its price will mirror the fact, as buyers sweep in to pick up as many shares as they can get their hands on. There are various catalysts that spur buying frenzies in the market. A recent case study example is GoPro Inc. (NASDAQ: GPRO).

Per Google Finance, GoPro develops mountable and wearable cameras, which they refer to as "capture devices," that facilitate professional-quality video recording. Their cameras are particularly popular amongst sports enthusiasts.

If you don’t take some money off the table, I think you’re being plain greedy.
— Jim Cramer, CNBC "Mad Money" Host & Founder of TheStreet.com, in reference to GPRO on 9/30/14

In recent weeks, anticipation has been building for the company's latest product, the Hero4. On Monday, 9/29/14, GoPro finally unveiled the Hero4. With the announcement, the company's stock surged to all time highs above $96 a share.

In this post, we'll dissect the stock's surreal run up. The chart below represents two time frames of interest to us from a price action standpoint. The first is the daily time frame for GPRO going back to mid-July. The second is the 30 minute time frame from 9/23 - 10/2.

$GPRO : GoPro Inc.

GPRO: Daily Price Action Analysis

GPRO really began to take off when it pushed above $50 and held that level in early September. Interestingly, $49.90 was the high for the stock on 7/1, shortly after its IPO debut.

After subsequently hitting resistance on 9/11 at just above $70, GPRO pulled back for several days but maintained support at $64. The bulls then rallied the stock past $70 on 9/23 and it continued higher, ultimately reaching a possible near-term peak of $96.45 on 9/30.

GPRO has experienced this monumental price rise due to the following factors:

  1. Small Float: although there are over 126 million common shares outstanding, only 20.5 million shares were tradable as of 10/1. This number represents the 'float' of shares available on the open market for traders to buy and sell. The rest of the shares are held by GoPro insiders and early investors that are unable to sell until December due to a typical post-IPO lock up restriction.
  2. Short Squeeze: on the break above $50, coupled with mounting expectations for the Hero4 release, demand for the stock quickly exceeded supply. A high percentage of the float had been shorted by the bears and they simply got crushed as they were forced to buy the stock back at ever higher prices to cover their short positions.

GPRO: 30 Minute Price Action Analysis

We can see that the stock began to stumble following an after-hours announcement on 10/1 that the company's founders broke a lock-up restriction on 5.8 million shares through the establishment of a charity foundation.

This news clearly spooked traders. Whereas the apparent demand for the stock had exceeded supply and helped rally the price beforehand, the news of the float being increased by 5.8 million shares likely subdued this effect. 

As the chart depicts, the $89 level held as support going into the close on 10/1, following the sharp pullback from the $96.45 high after the 9/30 open.

On 10/2, GPRO gapped down, opening at $87.42. It pulled back to as low as the $79 support level before making a comeback towards $89 later in the afternoon. Since $89 is now near-term resistance, it's no surprise that the stock sold off there, closing at $85.46 for the day.

Conclusion

GoPro is expected to report earnings on 10/30, so bulls may hold off on exiting in droves until the company's financials are further elucidated. However, the weight of supply tied to the increased float may offset the patience of many traders and compel further selling.

It remains to be seen whether GPRO can reclaim bullish momentum to push it past the $96.45 high set on 9/30. Moving forward, $89 is resistance above, while $79 and $70 are support levels to watch out for below.