If GoPro Is Peaking, Ambarella Is the Smarter Play

GoPro files its prospectus, but growth and gross margin concerns remain.

May 20, 2014 at 4:00PM


Outdoor enthusiasts know GoPro well, and soon investors will be able to say the same thing. We got our first glimpse into the maker of popular wearable cameras last night after filing its prospectus ahead of its initial public offering. 

As you can imagine, growth is off the charts. GoPro's booming popularity finds top-line growth soaring 125% in 2012 and another 87% last year to hit $985.7 million. Go Pro has also been consistently profitable with earnings climbing 31% in 2012, accelerating to an 88% advance in 2013. 

This is the kind of growth that would send drooling investors up to underwriters with wads of cash in their hands, but dig 19 pages into the S-1 filing and you will find this little gem.

Although our revenue and profitability have grown rapidly from 2009 through 2013, you should not consider our recent revenue growth as indicative of our future performance.

Companies detail risk factors in their filings, and a lot of it is boilerplate doomsday scenario stuff that rarely materializes. However, GoPro is explicitly telling investors to set aside the booming numbers of the past. That wouldn't be such a big deal if we didn't already know how 2014 is starting out.

Billion-dollar maybe 
It would've taken just a $14.3 million improvement in sales growth during this year's first quarter to push GoPro into the ranks of consumer tech companies with $1 billion in trailing sales. This would've seemed like a slam dunk. Revenue had to grow just 6% above the prior year's $255.1 million performance to get there. Unfortunately, we saw revenue decline to $235.7 million.

Adding insult to injury, operating expenses shot 46% higher, fueled largely by its research and development budget more than doubling. You don't mind seeing a company spending on R&D when sales are peaking. It shows that GoPro is investing in its future. However, seeing quarterly revenue slip 7% and earnings cut in half is not the way a company wants to be barreling toward its IPO. It may suggest that a company is approaching going public as an exit strategy rather than a way to finance its future growth.

Growth was already starting to decelerate given the 54% advance during the holiday quarter, but an actual decline in revenue and 52% plunge in net income is worrisome. The only silver lining here is that the first quarter of 2013 was unusually robust. Revenue nearly tripled for the period, and it was a rare sequential increase from the seasonally potent holiday quarter of 2012. It's still not what investors like to see, especially when GoPro itself is telling investors to expect more realistic growth in the future than they have experienced in the past.

Another red flag in the offering is the competitive nature of the camera market. Overall earnings growth has been solid, but gross margins have actually been deteriorating from 52% in 2011 to 43% in 2012 to just 37% last year. The silver lining there is that gross margins improved to 41% during this year's first quarter, but that was before the deluge of adding 139 hires to support its broadening product portfolio roughed up the bottom line. 

Under my Ambarella
Investors that want some skin in the GoPro IPO without the risk of a potential peak in popularity may want to kick the tires of Ambarella (NASDAQ:AMBA). The stock popped 5% higher earlier this year on the day that GoPro announced its plans to go public. It makes the video compression chips that fuel the slick wearable cameras, and even last night's S-1 reveals how important it is to its success:

We incorporate video compression and image processing semiconductors from one provider, Ambarella, into all of our cameras, and we do not have an alternative supplier for these key components. If Ambarella stopped supplying components on acceptable terms, or at all, or we experienced delays in receipt of components from Ambarella, we would experience a significant disruption in our ability to produce our products, and our business would be materially and adversely affected.

In short, GoPro doesn't have an alternative supplier to Ambarella for a key part that goes into all of its cameras. However, Ambarella's success doesn't rest entirely on GoPro. It also helps propel the popular Dropcam line of high-def Wi-Fi surveillance cameras and other products that would help offset the sting if GoPro is in fact peaking in popularity. By the same token it's also a play on the success of GoPro's upcoming IPO and a winner if GoPro's able to get back on track later this year.

The biggest thing to come out of Silicon Valley in years is wearable
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Rick Munarriz owns shares of Ambarella. The Motley Fool recommends and owns shares of Ambarella. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information