Shares of GoPro (NASDAQ:GPRO) recently slipped below its IPO price of $24. That's a humbling decline for a stock which traded in the $90s last October. But after that steep drop, contrarian investors might be thinking about buying some shares. Let's review GoPro's valuations, challenges, and growth prospects to decide.

Source: GoPro.

What the valuations tell us
GoPro currently trades at 18 times earnings, which is lower than the average P/E of 21 for the photographic equipment and supplies industry. Looking ahead, GoPro trades at 16 times forward earnings, which is slightly lower than the S&P 500's forward P/E of 17.

GoPro's P/E ratios look cheap, but they look even cheaper when we compare them to its projected annual earnings growth rate of 23% for the next five years. During that period, the overall industry is expected to report just 17% earnings growth while the S&P 500 will likely report just 6% growth. When we divide GoPro's P/E by its 5-year earnings growth rate, we get a 5-year PEG ratio of 0.8. This means that GoPro stock is trading at a discount to long-term earnings estimates, since a PEG ratio under 1 is generally considered "undervalued."

Why the market hates GoPro
However, long-term estimates can be derailed by fading interest, market commoditization, and technological disruption. GoPro's biggest problem is that its core action camera business faces diminishing returns. Customers are unlikely to upgrade their cameras unless the old ones stop working or new ones offer game-changing improvements. GoPro's top-tier Hero 4 Black and Silver can already capture 4K video, and moving ahead to 8K seems premature due to the niche appeal of 8K displays.

That's probably why GoPro introduced two cheaper devices (HERO+ LCD and HERO+) and a simplified premium one (Session) this year, instead of launching new flagship devices to replace the popular Hero 4 Black and Silver. GoPro hoped that these new devices could reach more mainstream consumers, but it didn't boost its marketing budget enough to do so.

The Session was also priced poorly at $400, the same price as the technologically superior Hero 4 Silver. Weak sales of the Session then forced GoPro to reduce its price by $100 and take a $19 million writedown during the third quarter, which caused it to miss the low end of its own guidance by $30 million. GoPro now expects its fourth quarter sales to decline 17% annually, due to a lack of flagship devices and unfavorable comparisons to last year's robust sales of the Hero 4 Black and Silver.

Lots of promises, little action
GoPro talks a lot about diversifying beyond action cameras, but we've seen little progress. Using YouTube and social media to spread viral videos is an interesting advertising strategy, but I don't think it should be considered a "media expansion" effort yet. GoPro's VR rigs have niche appeal, but they're unlikely to win over mainstream consumers until prices come down.

Earlier this year, GoPro CEO Nick Woodman said that the company was developing a cloud platform for backing up and editing videos. Unfortunately, investors haven't seen much progress there, and smaller rivals like 4GEE are leapfrogging over GoPro with 4G-connected action cameras. GoPro plans to launch its first drone next year, but market leader DJI Innovations already has a huge first mover's advantage.

The 4GEE connected action cam. Source: 4GEE.

Keep an eye on Apple
Earlier this year, Apple (NASDAQ:AAPL) was granted a patent for a GoPro-like action camera. Apple hasn't announced such a device yet, but an "Apple Cam" could certainly deal a devastating blow to GoPro. Apple has also been promoting the iPhone as an underwater and surfing camera with its new "Shot on iPhone" gallery, which raises troubling questions about Apple's true intentions for the action camera market.

GoPro bulls argue that iPhone owners are unlikely to mount their cameras on surfboards and motorcycles, but putting iPhones in waterproof cases or mounts could appeal to mainstream consumers who don't want to buy a separate camera. Moreover, the Apple Watch can also be used to take pictures on the iPhone.

Not all hope is lost
GoPro's huge third quarter miss, murky outlook regarding new sources of growth, and a pointless $300 million buyback plan all make me question Woodman's assertion that his company isn't a "one-trick pony."

But despite those problems, GoPro's stock is still fundamentally cheap, its brand is undeniably strong, and nearly half of its float was being shorted as of Nov. 10. This means that any good news whatsoever could cause a massive "short squeeze" which will cause the stock to rebound. GoPro still remains a risky buy below its IPO price, but I believe that shorting or selling it now is as silly as buying it above $90.