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Better Buy: GoPro, Inc. vs. Ambarella

By Rick Munarriz – Jul 28, 2016 at 12:42PM

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Pitting the leading maker of wearable cameras against the high-def video-chip solutions provider that serves as its supplier is a more challenging battle than you might expect.

Image source: GoPro.

Life was good for shareholders of Ambarella (AMBA -1.63%) and GoPro (GPRO) in 2014. That was the summer when GoPro went public at $24, more than quadrupling when it peaked four months later. Many millennials and folks with a penchant for an active outdoor lifestyle flocked to the high-def wearable cameras to chronicle their surroundings. The stock would go on to cool heading into the holidays, but IPO investors still wound up with a juicy 163% gain for the year.

Ambarella was faring well ahead of the GoPro Wall Street debut. The provider of video compression and image processing semiconductors seemed to be in all of the hot camera products, including dashboard cams and the eventually Nest-acquired Dropcam surveillance gear. However, it was its role as the lone provider of video chips for GoPro wearable cameras that fueled the most investor excitement long before they could snap up a piece of GoPro directly. Ambarella stock would go on to soar 240% in 2013, as thinking investors hopped on the GoPro craze before the actual IPO. Ambarella shares would go on to climb another 50% in 2014. 

Things have gotten rough for Ambarella investors -- and downright brutal for GoPro shareholders -- ever since. GoPro stock plummeted 72% last year, and it was down another 36% in 2016 through yesterday's close. Ambarella shares have held up substantially better, especially if we stick to things on a calendar basis. The stock actually rose nearly 10% in 2015 and is up a modest 4% year-to-date. However, those gains mask the grim reality for investors that bought into Ambarella when it peaked in the triple digits last summer. It has gone on to shed more than half of its peak value.

A fresh snapshot

Shares of GoPro opened 5% higher this morning after coming through with better than expected financial results. It was GoPro's third consecutive quarter of sharp year-over-year declining sales. Revenue plunged 47% this time around. However, there were encouraging sequential increases in sales and the number of units shipped, and GoPro's guidance points to a recovery during the second half of the year. GoPro is wading in red ink at the moment, but it expects to turn profitable during the fourth quarter. 

This doesn't mean that investors can breathe a sigh of relief. The stock may have already started to bounce back since bottoming out in the single digits earlier this year, but a lot of this upcoming holiday quarter's success will rest on the market reception for the rollout of its Hero 5 wearable camera and Karma drone that were delayed earlier this year. 

Ambarella won't report until next month. Its fiscal quarter actually comes to an end later this week. However, if we look at its quarter ending in April we see a company where revenue slipped 20% with weak shipments to GoPro being the biggest drag on its performance. 

This is where Ambarella's diversification helps. Margins may have contracted sharply with adjusted earnings cut in half in its fiscal first quarter, but at least it was still profitable. It was able to grow in other categories including home monitoring applications and drone-strapped cameras. Yes, Ambarella doesn't need GoPro's Karma to excel in the booming niche of flying cameras. Ambarella's solutions also power some smartphones and virtual reality upstarts. 

GoPro obviously offers the most upside if the wearable camera craze takes off again, but Ambarella should offer more stability with its thick Rolodex of customers toiling away in various video applications. 

Rick Munarriz owns shares of Ambarella. The Motley Fool owns shares of and recommends Ambarella and GoPro. 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.

Stocks Mentioned

Ambarella Stock Quote
$78.07 (-1.63%) $-1.29
GoPro Stock Quote
$5.30 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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