While GoPro (GPRO, Financial) looks exciting, and has the market buzzing, its supplier Ambarella (AMBA, Financial) seems to be the longer-term choice for the stability factor. As GoPro prepares for a great 4th quarter of FY 2014, and also the expected high during the first quarter of FY 2015, its prime supplier Ambarella is being pitched as a choice to cut out the risks of volatility. GoPro has been recovering from a near 50% dip in price from the high of $98.47 achieved during October 2014 and is expected to further consolidate during the end of the third quarter and the upcoming fourth quarter. However, it will also be dealing with the additional 76 million shares which were released late last year after the 60-day lock in period got over. However, with the secondary offering being placed at a very opportune time, the stakeholders could go in for a safe exit before the prices plunged.
GoPro remains a prominent name in the area of security cameras, and its notable sales volumes speak as testimony. This also rubs off as a benefit for its prime chip supplier Ambarella, who generates 30% of its revenue from the camera maker. Being a virtually exclusive supplier to the company gives it a high stability factor, apart from enjoying the success of its other ventures such as the IP and drones verticals. This is precisely what makes analysts gun for a 20% growth, pushing its stock in the range of $70 a share.
Analyzing Ambarella as a ‘buy’ stock
According to a Canaccord Genuity report, Ambarella has more than the commonly known presence in the wearable devices chip-making market; the enterprise video security systems, auto cameras and video broadcast areas are also the markets for them, which would make it feasible to stand up to the target revenue growth of 20-25% for the next several years.
For the past six quarters, there has been double-digit profit growth, and the EPS (earnings per share) is expected to be 88% amounting to 49 cents, which are based on the 48% revenue growth, landing at $59.01 million. These parameters are perhaps the most crucial indicators of what the stock would be positioned like; in the near future which further determines the way the market will react to it.
The competition tracks
As a chipmaker, GoPro happens to be a specialist at making security cameras. However, there is some competition in the form of Digital Ally (DGLY, Financial), and also that Apple (AAPL, Financial) is creating a wearable camera product, the area of action camera making is something that remains a GoPro stronghold in terms of its core expertise. On the other hand, Ambarella has a rival in the Singapore based Avago Technologies (AVGO, Financial), which is also forecast to be a financial hot pick, owing to the 130% jump in its EPS in the quarter at $1.93 a share. Since it has a reliable customer in the form of Apple for the new launched Apple iPhone 6 models the numbers are something the team at Ambarella and the stock market folks will be watching closely. Ambarella may have a size advantage, but wouldn’t be too complacent about positioning as the difference with Avago Technologies might not be as wide as between Go Pro and Digital Ally.
Final Verdict
GoPro has gotten itself into a stronger position in the last 2 quarters, and shouldn’t really loose out with the exception of not being able to control the volatility of its stock. Taking a more optimist view, the EPS of 70 cents a share and revenue of $580.22 million on the back of good holiday business, it can mobilize itself to push aggressively into its various verticals and capture as much of the consumer market possible. This in turn, will reduce the volatility, and help capitalize on the market leader’s position it has achieved and enjoys currently.
