GoPro announced in a press release on Feb. 7 that it plans to file with the SEC for a confidential IPO. GoPro is the world's best-selling camera, selling 2.3 million units in 2012 and raking in more than $500 million during that stretch. It is projected to have doubled that revenue in 2013, although we do not have the figures yet.
The technology behind the GoPro Hero line of action cameras is provided by Ambarella (NASDAQ:AMBA), the leading HD camera system-on-chip, or SoC, manufacturer. Expectations to double that $521 million 2012 revenue have contributed to a big run-up of Ambarella's shares in 2013.
The elephant in the room
There has also been speculation regarding Ambarella's partnership with Google (NASDAQ:GOOGL), which tasked the company with producing a wearable pendant camera that Google Helpouts users can deploy for that service. The Helpouts are like video tutorials that leverage user-generated live lessons in a variety of tasks. You offer live help for a fee or for free, and those tuning into your session make the payment to you directly. It's a marketplace for lessons in cooking, automotive, yoga, or anything that you may need help with and that someone else may have expertise in.
At the moment, Google Glass has a video processor SoC built by Texas Instruments (NASDAQ:TXN), so Google may be heating up the competition here by offering the Helpouts opportunity to Ambarella. Since it is clear that Ambarella can produce SoCs at scale to sell 3 million-5 million GoPros currently, it should be able to ramp up a new product line for Google as well. We should keep an eye on any developments here.
Although shares have fallen off their highs in the past month, an imminent GoPro IPO should put another arrow in the quiver for team Ambarella's bullish case heading into 2014.
Valuing the GoPro portion of Ambarella's product lineup
GoPro was given a possible $2.8 billion valuation following Foxconn's $200 million investment in December 2012, so it stands to be an IPO that will draw a big influx of cash for further growth. If GoPro Hero sales can keep pace, hitting $1 billion in revenue for 2013, then 2014's unit growth can add up to $7 million-$9 million. It is more realistic to imagine sales growth slowing at least a bit going forward, however. Assuming a 50% growth rate over 4.6 million units sold in 2013 -- the implied sales figures -- we arrive at 6.9 million units and $1.56 billion in revenue.
Ambarella does not break out specific sales figures for each of its product divisions, so it is tough to get a handle on what GoPro will do for the company's growth, particularly once an IPO gives GoPro a load of cash with which to drive new product innovation and marketing. Ambarella did $149 million in revenue over the past 12 months. Not knowing the cost of an A7 or A9 SoC makes it tough to imagine what 7 million GoPros will do to the bottom line, but it is a big positive to have major growth in the Americas and Europe, which have historically accounted for a much smaller proportion of revenue than Asia.
March 6 earnings
Ambarella is due to report fourth-quarter earnings on March 6, with guidance for revenue of $37million-$39 million and non-GAAP profit of $5 million-$6.5 million.
What to look for on the call:
- Comments regarding new or future "design wins." This is semiconductor-speak for new orders of significance. Since they often cannot mention the specific companies or products under non-disclosure agreements, we have to read the tea leaves or wait for gadget tear-downs once a product is released. This will give us color on GoPro orders, since GoPro will likely not release new sales figures until their IPO.
- Forward guidance becomes especially significant now, with the GoPro pipeline due to expand.
- Information regarding the recent partnership with Google and Dropcam. We all want to know the potential here.
- What's happening with MotorVu 360? This was just announced at CES, and should begin showing up in results.
- What percentage of revenue will come from North America and Europe? Right now, the majority of Ambarella's business is in lower-end automotive and security cameras in Hong Kong. The new areas of wearables, Dropcam, and GoPro should begin showing up as higher revenues in the lesser markets. Those products should also help with gross margin, which has weakened slightly. Although gross margin is extremely high at 63%, guidance calls for it to stay flat at the prior year's 67%.
Foolish bottom line
We want to wait for the quarter to come in before we make assumptions, but the stock has sold off 19% year to date, and nothing substantially has changed since investors put their faith in the stock up through $35 per share. If you bought it in the high $20s or low $30s, consider adding prior to earnings. Lately we've seen high-growth stocks surge on beats and positive guidance, so this may be the last time you will see the stock in the current price range. Ambarella has beaten consensus every quarter since becoming public.
With all of the recent new products and partnerships, as well as the high growth seen from GoPro, there is a good bit of confidence in its prospects. If you believe that there is major long-term potential for Ambarella, you should invest with conviction and keep an eye on how things play out with GoPro. Your next step is to put GoPro on your radar come late summer.