Source: YCharts
What: September was a particularly harsh month for Ambarella (AMBA +4.34%), as the company's stock price tumbled nearly 40% according to S&P Capital IQ data. The sell-off was spurred by comments the company's leadership made on its earnings call about falling semiconductor revenue.
So what: The company reported strong earnings at the beginning of September, with revenue shooting up 79% year-over-year to $84.2 million. That topped analysts expectations, but investors didn't like the fact that Amberalla CFO George Laplante said action camera revenue -- coming mainly from its relationship with GoPro -- would be down both sequentially and year-over-year in the coming quarter:
As we discussed in our Q1 earnings call, wearable camera revenues are expected to be down sequentially and year-over-year, reflecting the substantial build of newly released and existing products in Q2 of this year by GoPro and Xiaomi, rather than in Q3 as occurred in the prior years.
Ambarella's semiconductor business is closely tied with GoPro's action cameras, which use Ambarella's chips exclusively, and the company earns about one-third of its total revenue from sales to the camera maker. In the past, that partnership has helped Ambarella's stock skyrocket, but now it's having the opposite effect.
Now What: Ambarella's weak outlook could mean a few things for the company. First, it suggests GoPro won't release any new products for the rest of the year, which would deviate from the action camera company's typical product release schedule. While that wouldn't be good for Ambarella in the short-term, it wouldn't necessarily hurt the company over the long run.
Second, GoPro could be shifting some of its semiconductor purchases to another supplier, thus pushing down Ambarella's future outlook. Obviously, this would be a very bad outcome for the company, but it's also highly unlikely. There's really only two big names in the action camera business right now, GoPro and China-based Xiaomi, and Ambarella is a supplier to both of them.
Besides the weak outlook for the coming quarter, nothing has changed in this business. While the fiscal third quarter may be leaner than last year's, it's worth remembering that no other company comes close to Ambarella's lead in the action camera semiconductor business. Right now, the only long-term threat to the company would be if GoPro started moving its business away from Ambarella, or if its cameras weren't selling well. Neither of those are true right now, and investors sticking with Ambarella for the long haul likely have more to look forward to.
