GoPro's (NASDAQ:GPRO) stock recently jumped after the action camera maker's third-quarter numbers topped analysts' expectations. Its revenue fell 54% annually to $131.2 million but still beat estimates by about $5 million. Its net loss widened from $27.1 million to $74.8 million.

On a non-GAAP basis, its net loss also widened from $6.1 million to $61.3 million, or $0.42 per share, which still beat expectations by six cents. Wall Street set the bar pretty low this quarter, but the earnings beat still brought back some bulls. Let's see if that post-earnings pop is sustainable.

A Hero 8 Black camera dropping into the water.

Image source: GoPro.

The key numbers

GoPro priced its initial public offering at $24 per share in June 2014. It surged above $90 later that year before eventually dropping into the mid-single digits.

While sales surged 41% in 2014, with an adjusted gross margin of 45.1%, the top line quickly began to reverse course, rising just 16% in 2015 before falling 27% in 2016, staying flat in 2017, and dipping another 3% in 2018. By then, adjusted gross margin had fallen to just 32.8%.

GoPro's sales and profitability contracted for three main reasons: long upgrade cycles, tough competition from cheaper cameras and better smartphones, and a failure to expand beyond its niche base of outdoor enthusiasts. Bad business decisions -- including the introduction of cheaper cameras and a failed drone -- damaged its brand and exacerbated the pain.

Yet GoPro's revenue growth turned positive in the fourth quarter of 2018, then remained positive in the first half of 2019 as its gross margin expanded. That growth was mainly attributed to robust demand for the Hero 7 Black after its launch last September.

Period

Q4 2018

Q1 2019

Q2 2019

Q3 2019

YOY revenue growth

13%

20%

3%

(54%)

Adjusted gross margin

38.4%

34.2%

35.8%

23.4%

YOY = Year-over-year. Source: GoPro quarterly reports.

However, the stock plunged to an all-time low in October after it abruptly cut its full-year revenue guidance from 9% to 12% growth to just 6% to 9% growth. Management also reduced the midpoint of its adjusted gross margin for the second half of 2019 from 37.5% to 36.5%.

GoPro blamed the cut on a production delay for its new Hero 8 Black camera, which shifted the new device's sales from the third to the fourth quarter. However, the early introduction of the Hero 8 also prematurely killed off the popular Hero 7, since customers didn't want to buy a last-generation device.

A Hero 8 Black camera drops into the water.

Image source: Getty Images.

A brighter outlook for the fourth quarter and beyond

As a result, most investors expected GoPro's third-quarter report to be a trainwreck. But for the fourth quarter, GoPro expects its adjusted gross margin to expand to a midpoint of 40%, with non-GAAP EPS of $0.79 -- up from $0.30 a year earlier.

The company didn't provide exact revenue guidance, but analysts expect 51% growth on robust sales of the Hero 8 Black, which the company said already "eclipsed every previous new GoPro" -- including the Hero 7 Black -- within its first month.

Wall Street also expects GoPro's revenue and earnings to rise 5% and 32%, respectively, next year. Those are impressive growth rates for a stock that trades at just 10 times forward earnings and less than one times next year's sales.

Not out of the woods yet

GoPro's outlook for the fourth quarter is encouraging, but the company's track record of over-promising and under-delivering prevents me from calling it an undervalued growth stock.

The main problem is that GoPro is in a cyclical business that's approaching a peak instead of a trough. It might enjoy a short-term recovery with the Hero 7 and Hero 8, but it could struggle to top that performance once it saturates its core market. GoPro's main rival, DJI Innovations, also continues to leverage its lead in drones to launch new action cameras.

GoPro already controls 93% of the U.S. action camera market, according to the NPD Group, which doesn't leave it much room to grow in its top market. Its cloud-based subscription service, GoPro Plus, also remains too small to move the needle with just 305,000 paid subscribers.

Some bulls believe that GoPro is a takeover candidate for tech giants like Apple and Alphabet, and its brighter outlook for the fourth quarter might spark some meaningful interest again -- especially after Alphabet's surprising move to acquire Fitbit. However, investors should never buy a stock based on buyout buzz alone.

The bottom line

GoPro easily beat analysts' low expectations in the third quarter, but the real test will come in the holiday quarter and beyond. In short, GoPro has a lot to prove -- and I'm not convinced that it can sustain its post-earnings pop through the end of the year.