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Why Ambarella Inc Stock Dropped 10.8% Thursday

By Steve Symington - Oct 30, 2015 at 10:41AM

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The video chip specialist fell as its single largest customer offered a disappointing outlook.

What: Shares of video chip specialist Ambarella Inc ( AMBA 11.24% ) fell 10.8% Thursday after GoPro ( GPRO 3.85% ) announced weaker-than-expected third-quarter results and light forward guidance.

So what: Ambarella is GoPro's primary video chip supplier, so it's not uncommon to see the two stocks move in lockstep as investors associate the success (or struggles) of one with the other. Remember, GoPro shares fell as much as 10.6% in a single day last month after Ambarella blamed a sequential decline in the wearable camera segment for lower-than-expected guidance of its own -- never mind the fact Ambarella management said that decline was largely a consequence of timing, as GoPro this year launched two major products in Q2 rather than Q3 in past years.

This time, GoPro had an exceedingly difficult third quarter in which it not only fell far short of Wall Street's estimates, but also issued fourth-quarter guidance for revenue to fall around 17% year over year. For that, GoPro blamed a series of missteps related to under-funding marketing, and setting the initial price of one of those new products, the HERO4 Session, too high for consumers' tastes. 

Now what: But we also shouldn't rule out the possibility that GoPro's corrective actions -- including reducing the price of the HERO4 Session, ramping marketing spend, and expanding digital in-store and out-of-home initiatives globally -- might just put the action camera maker back on track for sustainable growth, which would in turn positively influence Ambarella's sales into the key wearable camera segment.

Investors should also remember Ambarella is working hard to diversify its operations, and has enjoyed significant growth from both the IP security and automotive video recorder camera markets in recent quarters as a result. That's also not to mention Ambarella's design wins in the drone segment, which -- likely for the better -- will almost certainly grow to include the highly anticipated first-half 2016 launch of GoPro's differentiated quadcopter platform.

For now, keeping in mind Ambarella stock has fallen 57% over the past three months as of this writing, I'm just not convinced its punishment fits the crime.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Ambarella, Inc. Stock Quote
Ambarella, Inc.
AMBA
$216.66 (11.24%) $21.89
GoPro, Inc. Stock Quote
GoPro, Inc.
GPRO
$10.51 (3.85%) $0.39

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