Shares of GoPro (GPRO -1.68%) recently perked up after Dougherty & Co. analysts upgraded the stock from "neutral" to "buy" with a price target of $55. Should investors follow that suggestion and buy the stock, which has fallen 34% year-to-date?

GoPro's entry-level HERO. Source: GoPro.

What GoPro's valuations tell us
Wall Street analysts, on average, expect GoPro to report diluted earnings of $1.38 per share in fiscal 2015. GoPro currently trades at 47 times trailing earnings. If GoPro continues trading at 40 to 50 times trailing earnings, $55 to $69 could be considered a "fair" value for the stock by the end of the year.

However, it's unclear if GoPro deserves that premium valuation. The company had a great run in fiscal 2014, as revenue rose 41% year-over-year and diluted earnings soared 164%. But looking ahead, things get much more challenging. For fiscal 2015, Wall Street expects GoPro's earnings and revenue to respectively rise just 4.5% and 24% year-over-year. That growth, while decent, might not justify its high P/E.

Not just another camera company
GoPro is hard to properly value due to its lack of direct competitors. If GoPro is just another camera company, its stock is grossly overvalued. For example, Canon (CAJ -2.65%) and Nikon (NINOY 6.61%) respectively trade at 18 and 24 times earnings.

But GoPro makes action cameras, not point-and-shoot digital cameras. According to IDC, GoPro controls 57% of the global action camera market. Its closest competitors, Sony (SONY 1.21%) and iON Cameras, only grabbed single-digit shares. Research firm Futuresource Consulting believes that global shipments of action cameras will soar from 5 million to 9 million units between 2013 and 2018.

Meanwhile, companies like Canon and Nikon's traditional point-and-shoot digital cameras are being cannibalized by smartphones. In fiscal 2014, Canon's sales only inched up 0.1% year-over-year. During the first three quarters of fiscal 2015, Nikon's top line fell 15.7%. Both companies have launched action cams, but neither has made a dent in GoPro's market.

Therefore, the valuations of "traditional" camera companies shouldn't be applied to GoPro stock.

GoPro's biggest problems
GoPro is growing faster than traditional camera companies, but several big problems could deflate that growth. If any of these risk factors materialize, shares could be severely punished.

Many of GoPro's competitors undercut its top-tier HERO cameras, which cost $400 to $500, with "good enough" devices which cost $100 to $200. Xiaomi, the top smartphone maker in China, recently undercut those devices with its $64 Yi Action Camera. By comparison, GoPro's cheapest device is the entry-level HERO, which costs $129.

Xiaomi's Yi Action Camera. Source: Xiaomi.

If GoPro has to match the prices of these competing action cams at home and abroad, its margins could decline. This could make expanding into China, which GoPro intends to do later this year, extremely challenging. Meanwhile, GoPro's higher-end devices are running out of room for technical improvement. Rumors indicate that its upcoming HERO 5 might feature 8K recording, but it's unclear if consumers -- who are still warming up to 4K TVs and content -- will need an 8K action cam.

GoPro's plans for growth
Since the future of GoPro's action cam business looks murky, it needs to diversify its top line with new businesses. GoPro has two main plans for expansion: growing its media business and entering the market for consumer drones.

GoPro's media business centers on the GoPro Network, a streaming video network which showcases user-submitted and professional content on YouTube, Roku, and other networks. However, the network doesn't generate any meaningful revenue yet.

GoPro will reportedly launch consumer drones for aerial photography later this year, which could diversify its business beyond action cameras. Parrot, one of the top consumer drone makers in the world, reported that its drone sales rose 97% year-over-year to €83 million ($89 million) last year. Unfortunately, matching or topping Parrot's sales wouldn't mean much to GoPro. Assuming that GoPro can generate $100 million in annual drone revenues, it would equal less than 6% of its projected 2015 revenue.

The verdict
In my opinion, GoPro could have a tough time justifying its lofty valuation in 2015. An increasing number of low-priced competitors will commoditize the action camera market, forcing GoPro to reduce prices and spend more on marketing. Delayed international expansion efforts, which CFO Jack Lazar hinted at during CES 2015, will give overseas rivals like Xiaomi a blazing head start. Lastly, GoPro's media and drone expansion plans can't adequately diversify its top line.

Therefore, GoPro will have a tough time delivering the growth its investors crave, and the stock could have more downside potential than upside potential at current prices.