The past couple of months have not been kind to Ambarella (NASDAQ:AMBA). Shares were crushed by 40% in September, followed by a 14% sell-off in October. The video processing chipmaker started off this week with another sell-off, this time thanks to an analyst downgrade. While Pacific Crest analyst Brad Erickson still has Ambarella at the equivalent of a "buy" rating, the analyst dramatically cut his estimates and price target. The latter dropped from $102 to $77.

Should investors be concerned about Ambarella's prospects?

Word on the Street
Most of the recent pessimism surrounding Ambarella can be tied back to main flame GoPro (NASDAQ:GPRO). GoPro missed revenue estimates last quarter and also provided lackluster guidance for the fourth quarter. The company also said it priced its new HERO4 Session waterproof camera too high at $400 and will need to lower prices to spur demand.

But Erickson believes GoPro inventory is swelling at retailers, which wouldn't bode well for Ambarella either since that would effectively translate into its chips sitting on shelves collecting dust as well. High performance action cameras haven't gained enough adoption as a product category to the point where they are a popular holiday gift, such as TVs or other types of gadgets.

As a result, the analyst is reducing his full-year estimates to $320.8 million in revenue and $3.02 in earnings per share. The consensus estimates call for $322.3 million in sales and earnings per share of $3.06. But Erickson is still bullish on Ambarella overall, citing opportunities in drones, surveillance, automotive cameras, and police cameras.

Where does Ambarella go from here?
However, Ambarella won't go uncontested in those markets. The drone market, in particular, is going to be a tough market to crack, particularly as larger chipmakers are looking to jump into tangential markets as their own core markets begin to slow.

Qualcomm (NASDAQ:QCOM) recently launched its Snapdragon Flight platform that poses a significant threat to Ambarella. Snapdragon processors can single-handedly perform many of the tasks that are currently performed by multiple components. By consolidating these functions, Qualcomm can offer manufacturers cost savings and design efficiencies, which can potentially bring down prices and subsequently boost consumer demand. Qualcomm has plenty of experience building these types of platforms, so it shouldn't be taken lightly.

Diversify, diversify, diversify
Ambarella's precipitous rise and dominant investing thesis always hinged on GoPro's success, and while the company will do its best to diversify into new market segments and broaden its customer base, the ties to GoPro have been painful recently.

Another aspect of Ambarella's ties to GoPro that sometimes goes unnoticed (which is true of many customer/supplier relationships) is the fact that Ambarella is also at the mercy of GoPro's pricing strategy. GoPro clearly made a pricing mistake with the HERO4 Session (which carries an Ambarella A7LS chip), which is exposing Ambarella to significant inventory risk. The only silver lining here is that if anyone is going to eat an inventory writedown, it'll be GoPro and not Ambarella.

Having significant customer concentration is always a double-edged sword and, in this case, GoPro's troubles will continue to weigh on Ambarella in the near term.

Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ambarella, GoPro, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.