GoPro (NASDAQ:GPRO), famous for its high-definition personal cameras often used in extreme action video photography, went public on June 27, selling shares at $24 a piece. In the first day of trading, shares raised 30%, as investors got excited about the high growth potential of GoPro's cameras.

The company's market capitalization eventually surpassed the $5 billion level. For many investors, GoPro isn't a traditional consumer electronics stock. Unlike Nikon (NASDAQOTH:NINOY) or Garmin, GoPro has managed to build a loyal community of fans interested in action sports. These users enjoy sharing their video content, and GoPro takes advantage of this user-generated content for marketing. Therefore, GoPro's valuation multiple -- much higher than the usual metrics seen in the consumer electronics industry -- could be justified. However, shares appear to have been underperforming since July 2. On the day, shares fell as much as 15%. Is GoPro's post-IPO rally finally over? More importantly, is GoPro's current market valuation sustainable?


Source: GoPro

It's all about growth potential
At first glance, GoPro's market valuation could look extremely unjustified. The company is trading at more than five times sales, and roughly 180 times earnings. By contrast, Nikon -- famous for its digital cameras -- is trading at just 13 times earnings in Tokyo. In theory, you could say that GoPro is extremely expensive, while Nikon could be regarded as a bargain. 

However, it should be noted that investors are clearly seeing GoPro as a growth stock, rather than a value pick. Therefore, valuation comparisons between GoPro and well-established camera players offer little meaning.

Note that GoPro's profit jumped 77% last year, reaching $61 million. In terms of top line, the company saw an 87% increase in 2013. Nikon, on the other hand, recently posted a 9% revenue decline for the year ending in March. The Japanese camera manufacturer is struggling with poor sales, as more users continue to replace their digital cameras with smartphones. Nikon is trying to overcome poor sales in the camera segment by entering the medical equipment market, but its lack of expertise in this field suggests there are plenty of risks involved.

Not just cameras
GoPro isn't just about manufacturing cameras. The company could also be seen as a special niche social network, as many of GoPro's customers like to share their videos -- usually of sports-related activities -- on the Internet. Not surprisingly, GoPro's YouTube channel has more than 1.7 million subscribers, and its Facebook page has more than seven million fans.

Aware of the vital importance that user-generated content is playing on its marketing strategy, GoPro released GoPro Studio, a desktop application that has been downloaded more than four million times. This program provides users with templates that allow them to easily create professional-quality videos.

The King of YouTube
By providing free video-editing software, and using a clever social media strategy, GoPro has managed to establish itself as one of the most popular YouTube channels. In the first quarter of 2014, there were nearly 6,000 daily uploads by users. GoPro's channel got more than 1 billion views, and over 50 million watched hours. 

Thanks to the thousands of videos shared by the GoPro community, GoPro's new customers learn about the company's products because of the content the products create. In this way, GoPro takes advantage of digital marketing to keep its community engaged, and also to attract potential customers.

Final Foolish takeaway
GoPro isn't just a consumer electronics company. It is a social network itself, as it has thousands of fans who upload new videos to its YouTube channel every day. Some of these videos end up becoming extremely popular, and are the best way for GoPro to get new business. Therefore, among camera companies, GoPro should be trading at a premium.

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Victoria Zhang has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.