Although GoPro (NASDAQ:GPRO) has developed a reputation as being a Wall Street dud, things haven’t been all that bad at the action camera company over the past few months. GoPro stock might even look attractive at first glance with good reason.

GoPro has reported back-to-back double beat quarters, and management has said time and time again that the company is on the verge of being profitable again in the back-half of 2018.

Moreover, GoPro recently announced that its latest product, the HERO7, achieved the highest week-one retail unit sell-thru of any new camera in the company’s history, implying that GoPro may be making comeback.

Amid this flurry of positive news, GoPro stock has risen nearly 40% over the past several months from $4.40 to $6. Is this rally over? Or is it just beginning?

I think that the rally in GoPro has already happened. The company should have a strong holiday season and will likely post profits in 2H18 for the first time in a while. But, the stock seems fully priced for this outcome.

Longer-term, GoPro stock should stabilize at current levels. Further upside will be limited by the fact that sales and profits will never get that big. As such, I think GoPro is best avoided here, but could be a buy if the stock dips back towards $5.

GoPro’s Fundamentals Are Improving

The fundamentals at GoPro are gradually improving.

This is a company that debuted on Wall Street with a ton fanfare. Everyone thought GoPro was going to reinvent the media game. They didn’t. Instead, GoPro turned out to be an action camera company and nothing more.

Moreover, the action camera market was supposed to be huge. Turns out, smartphone cameras got so good that hardly anyone needed an action camera. The action camera market shrunk. GoPro stock dropped. And, most investors have forgotten about it ever since.

But, GoPro has gradually established itself as the leader in the small but still valuable action camera market. There is a niche audience out there of mostly action sport and film enthusiasts who value an action camera over a smartphone camera.

For that group, GoPro is the name brand and go-to solution. Granted, this market has been shrinking, as have GoPro’s sales, but there are signs that demand is starting to stabilize.

GoPro just announced that its newest camera, HERO7, has launched with great success. In fact, it’s the best selling GoPro camera ever in its first week. That is big news. Trailing twelve month sales at GPRO are $1.15 billion. At their peak, they were over $1.75 billion. Thus, if HERO7 continues to be the company’s best-selling camera ever, GoPro sales have a lot of room to grow.

Also, gross margins are still eroding due to lower selling prices, but the company is rapidly pulling operating expenses out of the system. If gross margins can simply bounce back a few percentage points from their depressed base, then this company could turn into a consistently profitable operation.

Overall, the GoPro story is getting a lot better. This used to be a company with rapidly declining sales that ran huge losses. Now, GoPro is turning into a company with stabilizing sales and a chance at consistent profitability. Naturally, this positive narrative shift is a good thing for GoPro stock.

Long-Term Upside Is Priced In

Unfortunately, GoPro stock has already had its rally. The time to buy this stock was when it was in the $4 range back in March 2018. Now, at over $6, GoPro seems fully valued.

GoPro is a dominant player in a niche industry, and that niche industry is starting to show signs of life again. Because of that, I expect revenues to stabilize after this year, and project mild revenue growth over the next several years as average selling prices marginally improve alongside stabilized unit sales.

I also think gross margins can trend toward 35% due to ASP improvements. And I’m pretty sure that management will keep operating expenses depressed, given their huge efforts to cut opex over the past several quarters.

Modeling those assumptions out, I think GoPro can do about 50 cents in earnings-per-share in five years. A market-average 16X forward multiple on that implies a four-year forward price target of $8. Discounted back by 10%-per-year, that equates to a year-end price target for GPRO stock of roughly $6.

That is exactly where GoPro stock trades today. As such, I think upside in the near to medium term is capped by a full valuation.

Bottom Line on GPRO Stock

The fundamentals are improving at GoPro, but the stock is priced accordingly. As such, big dips should be viewed as long opportunities, while big rallies should be viewed as short opportunities.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.