What: Shares of Ambarella (NASDAQ:AMBA) fell as much as 11% in Thursday's market session. The company's largest customer, digital camera maker GoPro (NASDAQ:GPRO), fell nearly 8%, dragging the image-processing chip designer along for an amplified version of the same ride.
So what: Big-name analyst firm Morgan Stanley slashed its GoPro price targets by 44% on Thursday morning, while keeping its stock rating steady at the "hold" level. GoPro shares set a new all-time low on this news, and Ambarella fell to levels not seen since February.
Now what: Morgan Stanley analyst James Faucette surveyed a number of GoPro customers, and reached the conclusion that newer, sleeker GoPro HERO4 models just can't match the appeal of older versions. In Faucette's view, that spells trouble for the upcoming holiday season, where the newer cameras were intended to make a revenue-boosting splash.
Moreover, the analyst sees GoPro cameras lacking image editing and management features that have long been a standard part of Android and iOS smartphone cameras.
"We are also concerned that GoPro's opportunity to differentiate on software is onerous as the entire consumer electronics industry similarly wrestles with the compute, storage and bandwidth challenges of editing and sharing user-generated content filmed at high-definition on mobile devices," Faucette wrote.
Based on these findings, Faucette reduced his full-year revenue estimates for GoPro by 5%, while lowering his earnings target by 23%. His new revenue estimate is in line with the current Wall Street consensus, while Morgan Stanley's earnings target sits among the lowest Street projections today.
If Faucette's GoPro views are on point, it's still unclear exactly how these lower estimates would trickle down to Ambarella. What's bad for the goose is indeed also terrible for the gander, given the close business relationship between these two companies. But a 5% revenue reduction doesn't seem like it should translate into an 11% reduction of Ambarella's total market value. Remember, the components supplier has no reason to worry about GoPro's bottom-line profits, which is where Morgan Stanley placed its largest cuts this time.