Remember when GoPro Inc’s (NASDAQ:GPRO) action camera was an absolute must buy for any gift-giving occasion? Remember when investors were debating when GoPro stock would top $100 per share?
Of course you remember, as all this occurred just two short years ago.
Fast forward to present day and GoPro is now out of favor among consumers. Total sales fell 47% in its most recent quarter year-over-year yet some experts were actually bracing for a steeper decline.
GoPro stock even spent some time trading in the single digits this year, but has since doubled from its 52-week low of $8.62. Over the past few weeks investors have been perhaps overly optimistic that its new product, a drone called Karma, will restore investor confidence and return the company not necessarily back to its glory days of 2014, but above it 2016 lows.
GoPro Isn’t a Drone Company
At first glance a move into drones should be seen as a positive. After all, companies ranging from Chipotle Mexican Grill, Inc. (NYSE:CMG) to United Parcel Service, Inc. (NYSE:UPS) and Amazon.com, Inc. (NASDAQ:AMZN) are all incorporating drones into their business model. So how could GoPro go wrong?
For starters, GoPro isn’t a drone company. It is an action camera company that will soon be selling drones. This doesn’t erase, although it may distract from, the fact that its core business is in trouble.
Imagine if Apple’s answer to declining sales of its core product, the iPhone, was to introduce a smart speaker with Siri capabilities. Investors won’t applaud the announcement by pushing the stock higher — heck, investors might rush en masse to sell.
Yes, there is no doubt Apple would sell tons of smart speakers, but will the sales gains make up for lost iPhone revenue? Absolutely not, and the same logic could be applied to GPRO stock.
Alex Arnold of Detwiler Fenton estimated in a research note that GoPro faces a $150 million opportunity with its new drones. While this sounds like a solid number for a new product in a category still in its infancy, the analyst pointed out that this figure represents slightly more than just 10 percent of GoPro’s total sales over the past 12 months.
Is there anything special or unique about GoPro’s drone? Not really.
Is it competitively priced at $799 (or $1,099 with a Hero action camera attached)? No, considering the DJI Phantom 3 Quadcopter Drone can be bought on Amazon.com for less than $500, or the higher-end Phantom 4 Quadcopter can be bought for around $1,088.
Now ask yourself: if you are worried that GoPro can’t compete with DJI’s Phantom 4, how does GoPro stand a chance against DJI’s newest drone line which was just announced on Wednesday.
DJI’s new drone, called the Mavic Pro, has built in AI-enhanced features that allows the user to control the drone without a controller. The new drone is capable of gesture recognition and can even read hand signals. Chances are consumers dishing out $799 for GoPro’s drone will be very tempted to spend another $200 to buy the clearly superior Mavic Pro.
Finally, expect DJI’s older Phantom 4 models to go on sale at the same time GoPro’s camera hits the market. This can’t be good news for GoPro’s stock that appreciated on optimism of its drone.
But there is a way investors can profit from the upcoming surge in drone demand.
Buy GoPro’s Component Supplier
It’s no secret that the use of drones will surge over the coming years. The U.S. Federal Aviation Administration (FAA) said earlier this year that there will be more than 7 million small unmanned aircrafts bought in 2020. By comparison, 2.5 million drones are expected to be sold this year.
We have established that GoPro’s drone is late to the market and not competitive. So how could investors profit?
Instead of investing in one drone company — correction, one action camera company that sells drones — why not invest in one of the biggest component makers for drones, Ambarella Inc (NASDAQ:AMBA)
Ambarella’s stock used to be correlated with GoPro’s stock. When GoPro’s stock tumbled due to poor earnings or concerning news, AMBA would follow suit. But the relationship between the two is not as strong as it used to be.
Consider Ambarella’s recent earnings print in early August. AMBA stock reported an impressive quarter at a time when GoPro’s headwinds were well known, as evidenced by its near 50% drop in revenue year-over-year.
An earnings beat for Ambarella was attributed to another strong quarter from its key drone customer, DJI.
So, AMBA supplies GoPro with components for its action camera and supplies components for DJI’s drones. Presumably Ambarella’s technology will also be found inside GoPro’s Karma.
Ambarella also happens to be well positioned, with its technology found in wearable products, security systems and even automobiles.
Regardless of who wins the drone wars, AMBA stock will be working quietly behind the scenes and will continue growing over the years as more and more companies enter the drone rush and should tap Ambarella as a supplier.
As of this writing, Jayson Derrick did not hold a position in any of the aforementioned securities.
