Shares of video camera maker GoPro (NSDQ:GPRO) have surged 14% after the company managed to surprise on the upside by beating Q2 2016 revenue and earnings estimates. GoPro delivered revenue of $220.76M, up 20% Q/Q but down 47.4% year-over-year and beat the Wall Street consensus estimate by $30M. Meanwhile, the non-GAAP EPS of -$0.52 exceeded the consensus on Wall Street by 6 cents despite comparing poorly with the year-ago quarter when the company posted EPS of $0.35.

GoPro 5-Day Share Returns

Source: CNN Money

Key Highlights in the Report

The report contained a number of other key highlights including:

• Gross margin declined 400 bps Y/Y to 42.4% but climbed 1240 bps sequentially.
• 759,000 units were shipped, good for 8% Q/Q improvement.
• Unit ASP increased both sequentially and year-over-year by 11% and 14%, respectively.
• Sell-through exceeded sell-in by 50% during the quarter leading to a 36% Q/Q decline in channel inventory, the lowest level by the company since Q2 2014.
• Karma drone and HERO5 camera set to be unveiled before the holiday season.
• HERO4 Silver remained the best-selling action video camera for the 7^th consecutive quarter.
• GoPro reiterated its former FY 2016 revenue guidance of $1.35B-$1.5B.

GoPro added that its Quik (formerly Replay) and Splice mobile video apps registered 3.7M combined users, double the figure a quarter ago. Amount of shared content on GoPro's platform had doubled with the two apps recording total combined cumulative downloads of 37M. GoPro purchased Replay and Splice in February and that idea appears to have been good in hindsight since it's helped to significantly increase user engagement on the company's platform.

The worst could be over for GoPro

GPRO stock rallied strongly because the company's latest set of results suggest that the worst could now be over. All key metrics including revenue, gross margins, shipped units, and unit ASP posted sequential growth. Meanwhile, although gross margin posted year-over-year decline of 400bps, that was relatively decent compared to the first quarter when it tanked 1,220 bps to 33.0%.

Meanwhile, both non-GAAP and GAAP EPS improved sequentially by 19.2% and 18.2%, respectively.

GoPro recently took the painful decision to kill most of its product lines due to poor sell-through. The trimmed product line now features just three brands: Hero 4 Black, Hero4 Silver, and Hero4 Session. Although that decision suggested that GoPro's management was blindsided by events and did not have a good grasp of its core market, it has paid off by improving sell-thru and significantly lowering channel inventory just in time, ahead of the launch of Karma and HERO5.

Investors have all along feared that GoPro could be losing its status as the top manufacturer of action video cameras. But these fears seem unfounded. NPD Group's Retail Tracking Service says that GoPro products took 6 out of the top 10 slots during the quarter, including the top three best-selling video cameras in the U.S. The outfit also says that GoPro's combined digital camera/camcorder unit share in the U.S. increased 110 bps Y/Y to 21.3%.

Meanwhile, GoPro's new software offerings are enjoying good adoption. This helps in the company's efforts to transition from a hardware company to a media company.

Investor Takeaway

With GoPro product ASPs rising and the company set to launch two major products during the current year, there is a strong likelihood that GoPro could have turned the corner and could soon become profitable. This will mark the first time the company turns a profit since going public two years ago.

Although GoPro shares seem to have lately reversed course and were down 2.9% in Friday's trading, the initial strong price action of the shares despite the company posting serious top and bottom-line declines suggests that most of the negativity has already been baked into the shares. In my previous GoPro earnings preview, I concluded by saying that GoPro shares have limited downside and the new emerging tailwinds make it a good contrarian play. I would like to reiterate that position with the latest earnings beat helping to buttress my view. GoPro stock is still down 80% over the past 12 months and there could be good gains to be made from here.