GoPro (NASDAQ:GPRO) shares have been highly volatile since going public last July, bouncing from its IPO price of $24 per share to the high $80s before plunging to the low $40s this March. The stock soared again to the low $60s, then plummeted back to the $40s due to a broad market sell-off exacerbated by concerns about its expansion in China.

Source: Pixabay.

For investors who aren't discouraged by GoPro's stomach-churning volatility, the stock's 20% slide over the past month could represent a buying opportunity. Let's take a look at several factors that could dictate the direction of its stock in the near future.

Tricky valuations
At first glance, GoPro's valuation looks lofty. The stock trades at 43 times earnings and 3.7 times sales, compared to the S&P 500's P/E of 20 and P/S of 1.7. To be considered "fairly valued" in those terms, the stock would have to be cut in half.

Another problem is that GoPro doesn't have any direct competitors. If we consider it to be just another camera maker, its stock is overvalued. For example, leading camera makers Canon (NYSE:CAJ) and Nikon trade at 18 and 33 times earnings, respectively. However, both companies posted single-digit revenue growth and negative earnings growth in their most recent quarters.

Last quarter, GoPro's revenue rose 72% annually as GAAP net income surged 277%, indicating that it deserves to trade at higher multiples than the market or traditional camera makers. Moreover, the stock only trades at 22 times forward earnings, which is only slightly higher than the S&P 500's forward P/E of 17. GoPro's five-year PEG ratio of 0.8 also indicates that the stock is undervalued based on future earnings. Therefore, GoPro stock might initially look expensive, but its top and bottom line growth, along with forward valuations, make it look like a bargain.

The problem with forward valuations
Unfortunately, forward estimates -- especially five-year ones -- don't account for disruptive threats. If rivals start stealing market share away from GoPro, revenue will slip and it might need to sell its cameras at lower margins. Hungry rivals like Polaroid and Kodak are eager to take a bite out of GoPro's market with cheaper action cameras.

Last quarter, GoPro's international sales rose 126% annually and accounted for over 50% of its top line. China became a top-10 revenue generating country for the company, contributing heavily to a 183% jump in revenues from the Asia-Pacific region.

That development was encouraging, since some analysts feared that cheaper devices like Xiaomi's Yi Action Camera would impact sales. But the Chinese market also became a liability, due to concerns about the country's slowing economy. If GoPro's dependence on China rises as the yuan depreciates and its economy slows, its earnings growth could suffer.

Don't underestimate GoPro
GoPro knows that it can't just sell premium action cameras forever. That's why it unveiled plans to sell consumer drones and virtual reality mounts, and hired high profile media execs to beef up the GoPro Network with more original content. That's also why it's developing a cloud platform for automatic uploads and editing, which will streamline the sharing process for mainstream customers. GoPro has also filled out every price niche between $130-$500 with cameras to reach the maximum number of users.

GoPro's Hero 4 Session. Source: GoPro.

China also isn't GoPro's only growing market. Last quarter, European revenues more than doubled year over year to $137.2 million. The Americas market also remains healthy, with sales rising 39% to $212.3 million. Growth in those markets could offset weakness in the Chinese market.

Should you buy GoPro?
GoPro stock looks like a decent investment at current prices, but its volatility means it's definitely not a stock for queasy investors. Shorted-sighted investors will likely only see GoPro's high trailing multiples, its exposure to China, and its low competitive barriers.

However, investors who believe that GoPro can maintain dominance of the action cam market while launching new products and services should consider picking up some shares. The stock could certainly decline further from current levels, but I believe that it has considerable upside potential.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.