Things are going from bad to worse for Ambarella (NASDAQ:AMBA) after its stock price took a beating following the release of weak fiscal 2018 second-quarter guidance. Shares continue to be under pressure after news broke that one of its key drone customers might start sourcing chips from another supplier.

Ambarella's business was already in jeopardy -- its largest customer, GoPro (NASDAQ:GPRO), has struggled with high inventories from waning demand for action cameras. What does this one-two punch mean for investors?

Image of a girl flying a drone.

Image Source: Ambarella. 

The GoPro problem

Ambarella already warned that its GoPro business will take a hit as the action-camera maker struggles to move existing inventory. This weighed on the chipmaker's latest results as overall revenue grew 12.2% year over year, while business outside of GoPro jumped 16.1%.

This should be a red flag for Ambarella investors as the company generates 19% of its revenue directly from GoPro, with another 5% coming from GoPro's original design manufacturers (ODMs). The company has been forced to cut prices and lay off employees to stay above water, while a botched launch of its Karma drone in 2016 has quashed its prospects in that market.

However, GoPro hasn't given up on the drone market -- it relaunched the Karma earlier this year. Success is far from guaranteed due to stiff competition from DJI Innovations. Its new Spark drone sports a price tag of just $499 compared to the $1,099 Karma, and it cuts very few corners in terms of performance.

As fellow Fool Leo Sun points out, the Spark also comes with extra features such as obstacle avoidance and pre-programmed flight, and it costs just $100 more than the GoPro Hero 5 Black. 

Now, investors might argue that the success of DJI will be a tailwind for Ambarella as the former is its top drone customer. That might not be the case anymore.

Losing traction in drones

DJI is the world's biggest drone maker, and it has dealt a body blow to Ambarella by not using the company's chip in the Spark drone. In fact, Ambarella management admitted over the latest conference call that DJI is now going to multi-source its chips, introducing competition from Qualcomm.

Qualcomm has been quietly making inroads in the drone market. Two years ago, the company announced its intention of making high-quality drones affordable for customers with its Snapdragon Flight chipset. Qualcomm believed that it could slash the price of a 4K camera-equipped drone to a range of $300 to $400 while increasing flight time to almost an hour.

The company seems to have made impressive progress on this front since then, showing off a new technology earlier this year that will help drones learn and navigate their environment without the help of GPS. Not surprisingly, DJI was supposedly in negotiations with Qualcomm last year to employ this technology. To make matters worse, Ambarella is also losing traction with tier 2 drone makers who have decided to go with competing platforms in their products.

There's nothing to write home about in Ambarella's latest quarterly report as its top line growth lags a fast-growing industry. Investors should brace for more headwinds. If other major customers jump ship, the stock price will continue to suffer.

Harsh Chauhan has no position in any stocks mentioned. 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.