Is GoPro Stock a Buy?

An influx of competitors to the action camera market is one of the biggest concerns that investors and analysts have about GoPro stock. While emerging offerings from Sony, Kodak, and Polaroid represent credible challenges to GoPro's dominance, the recent announcement that Apple has secured a patent for a mounted camera device could signal the emergence of a much bigger threat. News that Apple could be readying competing action cameras sent GoPro's stock tumbling this week, though it's still up since its IPO in June.

GPRO data by YCharts

Does the looming Apple threat and substantial stock contraction indicate that the good times are over for GoPro bulls? Or does the big valuation dip present a worthwhile opportunity to invest in a company with high-flying potential? Let's take a look.

Putting GoPro's big swings in contextGoPro stock enjoyed an explosive debut with its June 2014 IPO, shooting up 55% in its first day on the market. Shares have yet to dip below their pricing at first market open, and currently trade roughly 71% higher than initial pricing while the S&P 500 has gained just 2.8% over the same stretch. The stock hit its current peak in October and traded as high as $98.47.

Apple undoubtedly ranks high on the list of companies that most budding tech enterprises would prefer not to compete against, but prospective investors should remember GoPro stock's history of volatility before taking the market's recent reaction as a surefire indication that the future looks dour. GoPro shares currently trade at roughly 153 times trailing earnings, making the company's valuation highly growth-dependent, so even relatively small stories have coincided with big pricing swings.

The emergence of a later-retracted report suggesting that a GoPro camera had been a contributing factor in a skiing injury caused shares to dip nearly 10% back in October. News that CEO Nicholas Woodman would make a sizable stock donation to charity also caused the stock to dip roughly 10% last fall. Meanwhile, Tuesday's Apple news correlated with GoPro stock dropping roughly 12.2%, which was followed by the stock gaining roughly 5% in Wednesday's trading. It closed Thursday at $48.58, down 7.2% from Wednesday's close.

Apple's potential entry into the action camera market is much bigger news than either of the other two stories I mentioned that sent the stock down, but the change in GoPro's stock price doesn't really bear that out, and could suggest resistance in its current price range and that a bigger bounce isn't far down the line. In terms of market cap, the skiing accident and charity stories actually coincided with bigger dollar amount valuation drops than did the Apple story.

What does GoPro have going for it?Despite being relatively small in terms of employee count and market cap, GoPro is the incumbent in the action camera space. That doesn't mean it will always retainthe crown, one needs only to look to Blackberry for a reminder of how quickly and dramatically tables can turn in the tech world, but it currently benefits from the fact that its products are nearly synonymous with the market it operates in. A report from IDC suggests that GoPro controls 47.5% of the action camera segment, but its hold is likely even stronger in terms of brand awareness. The company is also delivering impressive sales growth and has already achieved profitability, even if last quarter's gains of $0.34 a share on $14.6 million in net income is relatively small from $280 million in revenue.

Its last quarterly report delivered significant overperformace, with revenue growing roughly 45.7% year over year, and was accompanied by sales estimates for the current quarter, ended Dec. 31, 2014, that were significantly better than average analyst expectations. It's also worth noting that the $129 Hero camera gives GoPro representation in the low end of the action camera market, which should help the company retain market share and brand strength even if margins are affected. That said, I think GoPro's business currently lacks a moat if brand strength is excluded, a perception that seems to be reflected in the recent stock drop. On that front, the company's developing media network could be an attempt to create one. GoPro's video network probably won't generate big revenue even if it becomes widely used, but it could present significant defensive and marketing benefits.

Is GoPro stock a buy?One of Warren Buffett's most frequently cited adages suggests that investors should be fearful when others are greedy and greedy when others are fearful. The venerated investor is famously averse to tech stocks, but I suspect that now would be a great time for investors to apply his advice to GoPro, a stock many are now fearful of. The company's stock gains since September 2014 may have been erased, but there's precedent for big pops, and the most recent sell-offs seem to be driven by an element of irrationality. A granted patent is just that, even when Apple is the recipient.

The article Is GoPro Stock a Buy? originally appeared on Fool.com.

Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Apple and GoPro. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.