Here’s a surprise: Action camera maker GoPro (NASDAQ:GPRO) reported second-quarter numbers, and downtrodden GPRO stock actually rallied big in response. As of this writing, GPRO stock is up more than 15% in response to the company’s second-quarter earnings report.

Was the report actually good enough to change the long-term trajectory for GPRO stock? No. Revenues and earnings topped expectations. But, revenues are still dropping. Margins are still dropping. And profits are still nowhere to be found.

Is this a big earnings rally investors should fade? Yes.

I attribute a large portion of the post-earnings rally in GPRO stock to short covering. Those rallies almost never last, especially when the numbers still aren’t good enough to support the present valuation.

Consequently, I think $7 is about as high as GPRO stock will get for the foreseeable future.

Here’s a deeper look.

GoPro’s Quarter Wasn’t That Good

At its core, GoPro’s second-quarter report topped depressed expectations, but the numbers still weren’t good.

Revenues and earnings came in ahead of consensus estimates. But, revenues are still falling (down 5%). Gross margins are still compressing (down 540 basis points). And, operating losses are still widening, despite a significant reduction in operating expenses.

Meanwhile, the company’s last big growth lever — Plus subscriptions — is topping out. Plus subscriptions rose just 9% sequentially, versus 17% sequential growth in the prior quarter. Thus, any pipeline dreams of a GoPro revival through software subscriptions growth are being thrown out the window.

Overall, the quarter didn’t really feature anything that would make you think that GoPro is back. The company isn’t selling any more cameras. Average selling prices are still dropping due to lower price-points. Margins are compressing. The software business is ending its growth era. Profits are nowhere to be seen. 

Big takeaway? The quarter still wasn’t that good, and definitely not good enough to proclaim the beginning of a GoPro revival.

Short-Covering Fueled This Rally

If the numbers weren’t that good, then why is GPRO stock rallying by a whole bunch?

Short covering. JP Morgan astutely pointed out heading into the report that short interest was elevated, and that even decent results could result in a huge short squeeze. Indeed, short interest as a percent of the float was above 20% heading into the report.

The reality, though, is that short squeeze rallies don’t usually last. Normally, the shorts cover, creating huge buying pressure. But, once they are all done covering, there aren’t any buyers left. And the stock drops.

Given that GoPro’s underlying quarterly numbers weren’t that good (falling revenues, margins and profits), I think a similar situation will play out with GPRO stock. As such, $7 is a very temporary high.

GoPro Stock Isn’t Worth More Than $6

In the big picture, I understand that GoPro is the leader in the action camera market. But, I also understand that the action camera market has been eaten alive by smartphones, and that the market itself is quite niche.

Consequently, I view GoPro as a dominant player in a niche industry.

Because of that, I expect revenues to stabilize after this year, and I am actually projecting mild revenue growth over the next several years as average selling prices marginally improve. I also think gross margins can trend toward 35% due to ASP improvements. And, I’m pretty sure that management will keep operating expenses depressed, given their huge efforts to cut opex over the past several quarters.

The above assumptions are fairly aggressive. But, the reality is that without robust top-line growth or huge gross margin improvements back to 40%, GPRO stock isn’t worth anywhere near $7 today.

At best, I think this company does about 50 cents in earnings-per-share in five years. A market-average 16X forward multiple on that implies a four-year forward price target of $8. Discounted back by 10%-per-year, that equates to a year-end price target for GPRO stock of roughly $6.

Bottom Line on GPRO Stock

Don’t be fooled by the rally. GoPro’s quarter wasn’t that good. The big pop is simply the result of a short squeeze.

Longer-term, GPRO stock isn’t worth $7 today. As such, its recent $7 highs are a temporary thing. Over the next several months, this stock will drop back down to below $6.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.