The symbiotic relationship between Ambarella Inc (AMBA) and GoPro Inc (GPRO) isn’t what it used to be, but the link between the two companies is still a little stronger than Ambarella investors would like today.
AMBA stock is off more than 10% on Thursday in the wake of news that GoPro’s action cameras didn’t sell very well at all during 2015’s critically important holiday shopping season.
If action-camera mania has run its course, then Ambarella — which makes most of the electronics found inside GoPro’s cameras — could be facing a significant revenue headwind.
The situation begs the question — just how dependent is Ambarella on GoPro? Not as much as you might think.
Better still, Ambarella has a couple of things in its R&D pipeline that could end up being as big if not bigger than GoPro was for the company.
It Could Be Worse … You Could Own GPRO
It’s long been suspected, but was largely confirmed today, the market for action cams is neither as big nor as rabid as previously suggested.
Throw in bevy of new competition that surfaced in 2015, and it’s no real surprise to learn the company’s fourth quarter revenue fell to roughly $435 million. That’s 31% less than the $634 million in sales achieved in the fourth quarter of 2014, and even came up short of the $512 million analysts were expecting.
GPRO shares understandably fell 20% following the news as the market regained its wits to realize this isn’t just a hiccup for the company — GoPro has some serious, philosophical problems with its product’s premise.
Namely, not everyone is interested in filming everything they do or see; and not many of those that are interested in doing so are interested in upgrading their device or buying more than one action camera.
Perhaps, as a subtle hint, the company sees the storm brewing; which is why GoPro also announced it would be laying off 7% off its staff.
Fans and followers of GPRO will be quick to suggest the introduction of the Karma drone and 360-degree virtual reality cameras could open up all new markets for GoPro, but it’s not likely sales on those fronts will live up to the hype either. As Pacific Crest analyst Brad Erickson explained:
“A saturated action-camera market and our skepticism of traction for the Karma have us continuing to avoid GPRO. We acknowledge that the stock is crowded on the short side with short interest over 40%. Still, with a guide down for Q1 likely coming and improved demand nowhere in sight, we are viewing the shares as dead money for the time being.”
A Closer Look at Ambarella
As for why any of this would concern owners of AMBA stock, it’s simple — Ambarella still depends on GPRO for about 30% of its revenue.
That figure is shrinking, mind you. Some estimates early last year suggested close to 40% of Ambarella’s revenue came from GoPro. Ambarella still cultivates other markets though and growth in those areas is impressive to those who care to look past the GoPro story.
As an example, the security camera market drives 40% of Ambarella’s revenue, and the company has only begun to scratch the surface as organizations begin the migration of closed-circuit systems to IP-based solutions.
For perspective, the IP video surveillance market is projected to grow at an average pace of 24% over the course of the next four years. Other analysts suggest the annual growth rate could be closer to 37%.
Where Ambarella could make a really big splash, however, is in the automotive world.
It’s already got something of a toe-hold there with its dashboard camera. At this year’s Consumer Electronics Show, though, it unveiled a 270-degree-view camera of the car’s rear, for use while the vehicle is moving forward. Stifel Nicolaus analyst Kevin Cassidy thinks the technology could eventually replace side-mounted rear-view mirrors.
And that’s just one of the new auto-based products Ambarella has in the works as it positions itself to tap into an auto camera market that’s projected to be worth $17 billion per year by 2020.
The point is, while AMBA stock may deserve to take a few lumps as it weans itself off of GoPro, at least the GoPro dependence is fading — the two stocks aren’t destined to be intricately linked forever.
Indeed, while GPRO as we know it may never rebound from its recent performance-based drubbing, this setback for Ambarella shares may have already turned it into a bargain too good to pass up.
It’s just going to require more than a little patience to let Ambarella regroup and develop other, healthier business relationships.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
