Why We Wouldn't Short GoPro Stock

By Markets Fool.com

Nearly 40% of GoPro stock is currently sold short, which means many investors are betting against the mountable-camera maker today. Short-sellers borrow shares from a broker, then immediately sell those shares only to buy them back later, (hopefully) at a lower price. Ideally, the short-seller profits from the difference. However, if that stock goes up, short-sellers must cover their positions by buying back the stock at a higher price, incurring a loss in the process.

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Source: GoPro.com

Below, three Motley Fool contributors explain why they wouldn't short shares of GoPro, despite the heavy short interest in the stock today.

Dan Caplinger:GoPro has an interesting business model with a lot of upside, so selling the stock short is inherently dangerous. But even if I were certain that the stock wouldn't soar and thereby leave short-sellers with big losses, I still would be reluctant to go short the stock in my account.

What many people don't understand about short selling is that you can't always just borrow shares from some other investor effortlessly. If your broker deems a stock as "hard to borrow," then it will sometimes impose extra fees if you want to sell it short. In some cases, those fees represent a percentage of the share price, and for heavily shorted stocks, the annual fee rate can easily climb into the double-digit percentage range. In some isolated situations, hard-to-borrow fees can exceed 100% on an annual basis, making it essential that you not only make the right call, but that you make it in a timely fashion without having to keep the short position open any longer than necessary.

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With nearly 40% of its outstanding float sold short, GoPro almost certainly qualifies as hard to borrow. Paying short-selling fees can turn profits into net losses even if the share price goes down. With that additional headwind pushing against investors, selling GoPro short involves more risk than I'm comfortable assuming.

Keith Noonan: One of the main rationales for shorting GoPro is that the company's business appears highly susceptible to disruption from potential competitors, however, I think the stock still has the opportunity to thrive even as new rivals emerge and the camera market develops. GoPro has a strong brand backing up its high-end product line, and the action sports demographic that propelled the company to prominence tends to be brand-conscious and supportive of premium pricing given the right package.

Interestingly enough, potential competitorApple may provide a rough model for GoPro's path to long-term success. Like GoPro, comparing Apple's products to the competition based solely on a cost-to-performance basis would likely yield the impression that its offerings are overpriced, yet the consumer market clearly disagrees. Of course, GoPro isn't Apple, but the camera-maker is similarly faced with the long-term challenge of convincing consumers of the holistic appeal of its high-end products. I think it has a fair shot of success here.

GoPro already has brand strength working in its favor, and the company is bolstering its product ecosystem by improving its software, developing new hardware such as aerial drones, and expanding its media reach through pro-sports partnerships and deals with companies likeMicrosoftand Roku. GoPro is certainly a high-risk investment, but at current prices, I wouldn't bet against the possibility that it can cement itself as theNikeof action cameras.

: When many short-sellers cover their positions in a stock at the same time, this leads to ashort squeeze--a surge in the stock's price. Therefore, GoPro's high short interest could actually benefit its shareholders if the company gives investors a reason to push its stock higher. Nonetheless, it's easy to look at shares of GoPro and jump to the conclusion that the stock is overpriced.

However, critics may be overlooking key catalysts for the stock going forward including strategic partnerships with the likes of the NHL and ESPN, as well as, the eventual monetization of consumer-generated content on its GoPro Network. The company rang in 2015 by announcing its first major deal with a professional sports league. By teaming up with the NHL, GoPro cameras worn by players and officials will capture immersive footage from both practices as well as games.

If GoPro is able to establish itself as the standard for compelling video footage in professional sports, it could mean big things for the business and its stock in the months ahead. Not to mention, GoPro gets to keep the rights to the footage. This uniquely positions the company to capitalize on this content down the road. In fact, GoPro's chief financial officer, Jack Lazar, told JPMorgan last year that it would begin monetizing such media by licensing the content users upload to its site.

The takeaway here is that GoPro isn't resting on its laurels. Instead, the company is building a foundation that will enable it to profit not only from the sale of physical cameras, but also from the media it generates through strategic partnerships and submissions to its GoPro Network. For these reasons, I wouldn't short shares of GoPro today, as any positive news involving its growth prospects could incite a short-squeeze in the stock.

The article Why We Wouldn't Short GoPro Stock originally appeared on Fool.com.

Dan Caplinger owns shares of Apple. Keith Noonan has no position in any stocks mentioned. Tamara Rutter owns shares of Apple. The Motley Fool recommends Apple and GoPro. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.