Ambarella (AMBA, Financial) was a high-flying stock up until mid-2015. The stock has since reversed its path and has been falling consistently. With sales of Ambarella's star client GoPro (GPRO, Financial) showing weakness, Ambarella has dropped over 60% from its all-time highs.
It is highly likely that Ambarella will continue struggling for various reasons. Ambarella develops image-processing semiconductor solutions for a variety of industries. Throughout the past few years, the company’s shares have been moving downward. Ambarella’s shares declined to $33 from around $129 in June 2014.
The primary reason behind the company’s bad condition is weakness in wearable sports retailers, specifically GoPro. GoPro recently reported that its four quarter sales dropped 31% year over year. The sales were affected by software concerns that prevented users from downloading and editing content.
The problem has yet to be solved, as it would take more time before GoPro finds its footing. The GoPro fad is slowly dying, and as a result, the company is reporting strong drop in sales. This trend will likely continue and have a negative impact on Ambarella.
A huge problem
Qualcomm (QCOM, Financial) is the largest chip manufacturer globally, and recently decided to diversify from the saturated mobile chip sector. Qualcomm has been using its mobile technology to manufacture SoCs for dashcams, drones and action cameras, which can be linked to cellular networks.
In 2015, Morgan Stanley (MS, Financial) reported that even though Qualcomm’s image processing SoCs were not as cost effective as Ambarella’s SoCs, Qualcomm could achieve a price benefit as soon as cellular connections were powered in.
Qualcomm has previously had design wins for 4G featured action cameras such as Benq's QC1 and 4GEE Action Cam. In last quarter's conference call, it was confirmed that Qualcomm was putting huge efforts to snatch GoPro and drone maker DJI Innovations away from Ambarella.
It clearly indicates that the company’s stockholders should not ignore Qualcomm’s capability to win over GoPro. Recently, GoPro shared that the company’s Hero 5 will be the most connected and efficient product, indicating that it might use a 4G-linked SoC like Qualcomm’s. If GoPro selects Qualcomm for its Hero 5, then Ambarella could face a major problem.
Conclusion
This is a lose-lose situation for Ambarella investors. If the company manages to hold onto GoPro, it will still struggle due to the latter's falling sales. However, if the company loses its spot in GoPro's cameras, then shares will definitely be hammered. Thus, investors shouldn't bet on Ambarella's turnaround just yet.
Disclosure: I do not hold a position in any of the stocks discussed in the article.
