Popping Bubbles

green blue and pink bubbles

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Based on the dot.com experience, popping bubbles are often associated with the complete collapse of companies like eToys, Pets.com, or Webvan, but that is as much the exception as the rule. It is equally common that following an immense and unsustainable rise in stock price, the bubble pops without much change in the operations and profitability of the company. Instead, the bubble is based on the development of a wildly enthusiastic prediction of the company’s future and is popped by the recognition that the forecasts were wildly enthusiastic. All of this can happen without much change in ongoing operations. The best way to illustrate what can happen is with some examples.

A good place to start is with GoPro (GPRO). GoPro is a maker of action cameras popular with athletes and outdoor activity enthusiasts. As with many tech companies, GoPro went public in mid-2014 with all the associated excitement. In a story that was to become increasingly common, GoPro was billed as much more than a camera company in a competitive photography market. It was a budding social media company for the active set. It was a potential competitor for YouTube. It was a “lifestyle” company. It was going to reinvent the drone. In response to the hype regarding the bevy of opportunities, the market price of GoPro skyrocketed reaching a high of nearly $100, giving it a market cap of over $11 billion.

Unfortunately, reality set in. It turned out that GoPro was a camera company. True it was an innovative camera company, but it was not a social media firm or the new YouTube. As a result, the stock price plummeted. As shown in the graph below, by year-end 2017, the company was trading for less than $10 per share, a level it has yet to surpass since then. This does not mean that GoPro was a failed company. It still makes a good action camera in a competitive market. It trades at what now appears to be close to fair value. The bubble popped back in 2015 when the expectations were found to be wildly optimistic, but the company never failed.

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Disclaimer: Cornell Capital Group LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or ...

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