Can GoPro's Standout Quarter Change Investors' Perception?

It seems that investors are feeling better about GoPro, Inc.’s (NASDAQ:GPRO) prospects, after the company reported better-than-expected results for second-quarter 2017 recently, considering the sharply rising share price of the company.

The action camera maker’s bottom-line figure crushed expectations in the recently reported quarter, as GoPro’s adjusted loss of 14 cents trumped the Zacks Consensus Estimate of a loss of 34 cents by a whopping 58.8%. It seems that the company’s substantial cost-cutting initiatives were highly successful in stemming its earnings decline.

In addition, the company posted better-than-expected revenue numbers for the quarter and reduced its operating expenses significantly. GoPro surprised investors with its sales figures, as its quarterly revenues grew an impressive 34.3% from the prior-year quarter tally to $296.5 million. The revenue growth was fueled by robust sales of the latest Hero5 cameras, Karma growth and strong accessory revenue.

This marked the company’s third consecutive quarter of revenue growth after four successive quarters of sales declines.

On the face of it, things seem to have turned around for the better for GoPro, and the stock is showing signs of life too. Still, the company lost money in six of the last seven quarters, and investors need to dig a little deeper to glean whether the improvement is sustainable.

The action camera market is still grappling with serious demand issues and ever-increasing competition. Players like Sony Corporation (NYSE:SNE) , Garmin Ltd. (NASDAQ:GRMN) , Nikon Corporation (OTC:NINOY) , and several others have entered the market, which is turn is evidently contracting GoPro's margins.

In fact, the company is likely on track for its third consecutive year of margin compression, and this does not bode well for its bottom line. In the second-quarter results, its gross margins contracted a whopping 650 basis points year over year.

GoPro’s negative cash generation has also been worrisome of late. Net cash used in operating activities rose 89.7% year over year in the last reported quarter.

Also, GoPro’s inventory levels have been causing serious hiccups over the last couple of years. Excessive inventory is not good for either new releases or retailers. So, management decided to revert to its old system of limiting releases, regardless of whether demand exceeds supply. This sets the company up for leaner channels and better inventory levels.

In the second quarter, we witnessed that GoPro’s focus on improving inventory and channel management resulted in a 39% reduction in inventory sequentially, and forward weeks of supply in the channel are down 25%. This bodes well for GoPro’s upcoming product launches.

Also, the fact remains that sales really have rebounded after the release of HERO5 in the fourth quarter of last year. If the market was truly saturated or the company was losing market share amid such intense competition, GoPro would have seen a persistent decline in sales.

The upcoming holiday season will serve as the true test for the company, and will determine whether GoPro's management will be able to right the ship and return the company to profitability. It will be launching both the Hero6 camera and Fusion – a 5.2k spherical camera soon. Also, this will be the first holiday season in which the Karma Drone will be fully available, after the recall disaster last season.

In order to restore investor confidence, GoPro will need a series of strong quarters — and that means no operational glitches, sub-par guidance, production delays or messed-up product launches.

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