Last October, I compared GoPro (NASDAQ:GPRO) with its supplier Ambarella (NASDAQ:AMBA). At the time, I concluded that Ambarella's more diversified business model, stronger margins, and lower valuations made it the better play.

Since that article was published, shares of GoPro and Ambarella have respectively fallen 51% and 17%. While Ambarella certainly fared better than GoPro, investors would have been better off if they simply avoided both stocks.

GoPro's Karma drone.

GoPro's Karma drone. Image source: GoPro.

Therefore, I believe that it's time to reevaluate both companies and compare their growth forecasts and valuations to see if either stock is actually worth buying at these levels.

GoPro's strengths and weaknesses

GoPro is the biggest action camera maker in the world. However, its success was a double-edged sword -- sales soared in the years preceding its IPO in 2014, but quickly peaked after it saturated its core market of outdoor enthusiasts.

Its core customers became reluctant to upgrade their cameras, cheaper rivals flooded the market, and mainstream consumers shunned stand-alone action cameras as smartphone cameras improved. Those headwinds caused GoPro's revenue to plunge 27% to $1.19 billion last year, compared to 16% growth in 2015.

However, analysts expect GoPro's sales to rise 13% this year, fueled by sales of the new Hero 5 cameras, Karma drone, Karma Grip handheld stabilizer, and the upcoming Fusion 360-degree stand-alone camera. Its new "trade-up" plan, which enables users to trade in older GoPros for discounts on the new Hero 5 and Session, could also convince stubborn core users to finally upgrade. GoPro posted a steep loss last year, but the company expects to claw back to non-GAAP profitability this year after some big cost-cutting moves.

Ambarella's strengths and weaknesses

Ambarella produces image processing system-on-chips (SoCs) for action cameras, security cameras, dash cams, drones, and other devices. Its major customers include GoPro, drone market leader DJI Innovations, and security camera leader Hikvision.

An image processing SoC from Ambarella.

An image processing SoC from Ambarella. Image source: Ambarella.

Ambarella's biggest customer is GoPro, but that blessing became a curse as the action camera maker's sales peaked. Direct orders from GoPro generated nearly a fifth of Ambarella's revenue last year, but Stifel Nicolaus analyst Kevin Cassidy expects that percentage to drop to just 5% this year. That reduction can be attributed to Ambarella's growing sales of SoCs for security cameras, drones, and cars.

Revenue for Ambarella dipped 2% to $310.3 million last year, mainly due to GoPro's slowdown. Sales are expected to remain flat this year, before accelerating next year as its dependence on the action camera market declines. On the bottom line, pressures from sluggish chip sales, higher expenses, and pricing pressure from rivals in China caused its earnings to fall 12% last year. Analysts expect that ongoing pressure to cause its earnings to slide another 25% this year, before possibly rebounding next year.

Unpredictable headwinds

Both companies face unpredictable headwinds. GoPro's future depends heavily on the Karma gaining market share against DJI's deeply entrenched drones, new cameras standing out in a saturated market, and new software initiatives (Quik, Capture, and GoPro Plus) locking in more users. It's unclear if any of these efforts will pay off and widen its moat against its growing list of competitors.

Ambarella needs to continue diversifying its customer base while offering better image processing chips at more competitive prices. That could be tough, since mobile chipmaker Qualcomm (NASDAQ:QCOM) has been developing comparable image processing SoCs with wireless connectivity -- a feature that Ambarella chips still lack. Recent rumors suggest that GoPro might split its orders between Ambarella and Qualcomm -- and other major customers could follow suit.

What do the valuations tell us?

GoPro's P/E ratio is negative due to its lack of profitability last year. However, its price-to-sales ratio of 1 is well below the industry average of 2.7, and indicates that the stock could be bottoming out -- if its year-over-year sales growth consistently recovers.

Ambarella trades at 36 times earnings, compared to an industry average of 27. Its P/S ratio of 6.6 is also much higher than the industry average of 4.6. Those premium valuations aren't justified by its top- and bottom-line growth -- so Ambarella looks pretty pricey at current levels.

My take: Buy neither stock (for now)

For now, I think investors should avoid both stocks. GoPro has more upside potential as a turnaround play, but the management's missteps make it tough for the company to get its act together before well-oiled rivals like DJI box it into a corner.

Ambarella's evolution from GoPro supplier to a best-in-breed maker of image processing SoCs for multiple industries is admirable, but it's not inspiring enough to justify its current valuation. I personally like Ambarella' business model, but I'd only start a position at much lower prices.

Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Ambarella, GoPro, and Qualcomm. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.