I've had my eye on action camera maker GoPro (NASDAQ:GPRO) for a while now. The once high-flying stock has fallen more than 40% since the beginning of the year, and it now hovers just above its 52-week low.

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Source: Pixabay.

That kind of collapse would be expected of companies with disappointing earnings, but GoPro has beaten revenue and earnings estimates every quarter since its IPO last July. So, after taking a closer look at this beaten-down stock, I finally decided to pick up some shares for three main reasons.

1. The overreaction to Ambarella
Ambarella (NASDAQ: AMBA) makes the image-processing chips for GoPro and other action camera and drone makers. Therefore, many investors look to Ambarella's earnings for clues regarding GoPro's performance.

During Ambarella's second-quarter earnings call, CFO George Laplante stated that the company's wearable cameras revenue would decline sequentially and annually during the third quarter because of a lack of major product launches. During Ambarella's second quarter, when revenues rose 79% annually, GoPro launched its HERO+ LCD and HERO4 Session cameras. GoPro's next flagship camera, the HERO 5, will skip Ambarella's third quarter and probably won't arrive until next year.

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The HERO4 Session. Source: GoPro.

Laplante already told investors the same thing during the first quarter, noting that Ambarella would post stronger growth in the second quarter, fueled by new products and slower growth in the second half. Therefore, the company's outlook didn't actually change.

Nonetheless, investors interpreted the forecast as a red flag for GoPro's growth and dumped both stocks. Yet things aren't as bad as they seem. Last quarter, GoPro forecast a 56% year-over-year increase in revenue during its third quarter. That's a slight slowdown from 72% growth in the second quarter, but still solid growth for a quarter with no new cameras.

2. Cheap valuations
At $39, GoPro now trades at just 18 times forward earnings, which is only slightly higher than the S&P 500's forward P/E of 17. However, GoPro's bottom line is growing at a much faster rate than the market's -- last quarter, its net income jumped 277% annually as GAAP earnings per share soared 200%.

GoPro's trailing P/E of 33 also represents its cheapest valuation since the company went public. That's all the way down from a P/E in the 90s last October, when the stock traded in the mid-$80s. The last time the stock traded at $39, in July 2014, GoPro wasn't even profitable on a GAAP basis. Looking ahead to the third quarter, GoPro expects sales of its "premium" $399+ cameras to account for over half of its unit shipments and revenue, which should help margins expand and fuel stronger earnings growth.

Lastly, the 5-year PEG ratio tells us how cheap a stock is based on forward earnings estimates, and a ratio under 1 is considered cheap. GoPro easily passes that test with a 5-year PEG ratio of 0.7, based on Thomson Reuters estimates.

3. Lots of growth potential
One of GoPro's biggest purported weaknesses is its lack of defensive barriers against cheaper competitors. Still, none of those competitors have dented GoPro's revenue and earnings growth yet, and the company still controls over half of the worldwide action camera market, according to IDC. China even became a top-10 revenue-generating country for GoPro last quarter, despite fears that Xiaomi's cheaper action camera and a slowing economy would hurt sales.

GoPro has capitalized on its first-mover's advantage and turned its brand into a media outlet. The GoPro Channel, which features user-submitted and professional videos, acts a free promotional tool with videos that often go viral. The channel has 3.3 million subscribers on YouTube and can be viewed on Virgin America flights, Xbox consoles, Roku devices, and various social networks. It's building on those foundations by hiring high-profile media execs to develop original content and letting creators sell their content to marketers via a premium content portal.

To accelerate that growth, GoPro recently launched an app that lets users quickly trim and share videos, and it's developing a cloud-based platform for backing up videos. The more people share GoPro videos, the bigger the GoPro Channel gets, and the more free advertising it receives. GoPro also has big plans for the VR and drone markets, which could diversify its top line beyond action cameras as early as next year.

The bottom line
GoPro is a highly volatile stock that certainly isn't for everyone. But at current prices, I believe it has plenty of upside potential, thanks to irrational selling, low valuations, and growth potential beyond action cameras. Therefore, I believe investors who start a position in GoPro today and offset the wild swings with dollar-cost averaging could be well rewarded over the next few years.

Leo Sun owns shares of GoPro. The Motley Fool owns and recommends Ambarella and GoPro. 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.