GoPro (GPRO 1.30%) has long struggled to make its business into one that attracts a diverse group of users across multiple markets, and it has had to find ways to stand out and compete. Its stock struggled right along with it, amid market conditions limiting it as well. With high-resolution cameras available on many smartphones, GoPro has had to somewhat settle for being a niche company supported by sports and thrill-seeking enthusiasts.

GoPro has used this niche market to grow revenue over time directly and indirectly from its core business. And that is helping its stock. There are at least three reasons to think this tech stock can continue to find success down this path. There is also at least one key challenge it faces that potential investors need to factor in.

Reason to buy: Domination within its niche

A perception of being an app without an ecosystem has long hurt GoPro stock. With sophisticated cameras built into smartphones and manufacturers continuing to make improvements, GoPro's cameras held little appeal.

However, GoPro seems to have taken a page from Garmin's playbook. When smartphones added GPS functionality, Garmin pivoted into non-automotive GPS products, a move that probably saved its business. Likewise, GoPro has built cameras with functionality not feasible for an Apple iPhone or Samsung Galaxy to offer.

Unlike smartphone cameras, GoPro explicitly designs its cameras to take sports and action shots. Its cameras are small, portable, and wearable. More importantly, they can hold up in unstable environments and are usable underwater. Moreover, it can take high-resolution shots under such conditions and offers 4k and 5k video quality levels.

Also, its cameras range from approximately $280 to $580. With iPhones selling for as much as $999, these allow for better pictures without risking the destruction or theft of an expensive smartphone.

Reason to buy: High-profit service offerings

GoPro continues to find ways to drive income besides selling cameras. For example, it has worked to increase subscription and service revenue. For a $49.99 yearly subscription fee, GoPro now provides its users unlimited cloud backup, live streaming tools, access to a premium editing tool, and guaranteed camera replacement. It also offers the editing app only for $9.99 per year.

These offerings helped to grow its subscriber base by 65% year over year in the second quarter. With that increase, subscription and service revenue claimed $39 million of GoPro's $467 million revenue in the first two quarters of 2022, increasing by 72% yearly.

Additionally, this segment has likely become a source of high-margin profit. Producing hardware is typically a low-margin business. However, GoPro reported a gross profit margin of 40% in the first half of 2022, indicating that the subscription and service segment is responsible for such margins.

Reason to buy: Valuation

Amid worries about competition, investors have wiped out most of this company's stock price value. Since peaking above $98 per share in late 2014, GoPro stock steadily dropped, reaching the single digits by late 2016. Today, it trades in the $7 per-share range.

GPRO Chart

GPRO data by YCharts.

Nonetheless, during that time, GoPro evolved into a profitable company. Today, its trailing price-to-earnings (P/E) ratio stands at under eight. This is significantly lower than Apple at 29 times earnings and Garmin, which faces a similar competitive situation, at a 19 P/E ratio. 

Reason to sell: The ongoing competitive threat

By pivoting into action cameras, GoPro has managed to build a profitable business. However, Apple, Samsung, and other smartphone manufacturers continue to make technical improvements to their cameras. These manufacturers could choose to develop sports cameras tied to the iOS and Android ecosystems.

Thus, GoPro needs to keep investing in its technology to make its new cameras better and cheaper. If it stops fighting this battle, users will have little incentive to use GoPro products or subscription services.

Investors also remember that the fear of competition has contributed to its stock selling at more than a 90% discount to its all-time high. Both the stock price and the company depend on making GoPro and its ecosystem valuable to its users.

Should I consider GoPro?

The ongoing competitive threat to GoPro remains a concerning issue. That threat of technical change is always going to make GoPro stock risky.

Nonetheless, a low P/E ratio and the growth of its subscription business could justify a speculative position for more risk-tolerant investors. As long as it continues to dominate its niche, it increasingly looks like a growth stock that could soar.