A lot was at stake for investors of GoPro, Inc. GPRO, the high-definition action camera manufacturer, soon after its biggest supplier Ambarella, Inc. AMBA reported third-quarter fiscal 2016 earnings yesterday post the closing bell. Shares of GoPro slipped 5.8% to close at $18.93 during the regular trading session on Thursday and continued its downward slide in after-market trading session to settle at $18.70 (down 1.2%). The decline was primarily triggered by Ambarella’s lukewarm fourth-quarter guidance.
Thursday’s Plunge
If you are wondering about what caused Thursday’s fall you don’t have to look beyond Ambarella’s fourth-quarter guidance. Though Ambarella’s third-quarter earnings can make its peers go green with envy, its guidance miffed the market. The developer of compression and image processing semiconductors reported adjusted earnings per share of 87 cents, beating the Zacks Consensus Estimate by 22.5% (16 cents); while revenues of $93 million surpassed the Zacks Consensus Estimate of $91 million.
However, for the fourth quarter, Ambarella expects revenues in a range of $65–$67.5 million, which is well below the consensus of $76.3 million forecasted by Wall Street analysts. This is particularly disappointing, considering that the holiday season euphoria usually drives maximum customer frenzy for action cameras, leading to upward swing in revenues.
The relationship between GoPro and Ambarella is symbiotic to a large extent, as the latter is a major supplier of semiconductor chips for the former. Ambarella’s state-of-the-art video chips are extensively deployed in most of GoPro’s offerings, including wearable cameras, surveillance gears, automotive dashboard recorders and broadcast infrastructure encoders. As the two companies’ growth engines are welded together, investors generally weigh the benefits of buying these stocks jointly.
And the Fall Continues
Thursday’s plunge will remind investors of a similar collapse in GoPro’s shares (down 6.2%), when Ambarella had reported its second-quarter fiscal 2016 earnings. Overall, GoPro’s shares have plummeted 68.5% in the past six months, an unnerving statistic that is sure to rattle investors.
GoPro, having grabbed headlines for its meteoric rise throughout 2014, recently featured in the news for its sharp fall in share prices. Presently, the company is trading way below its Initial Public Offering price of $24.00.
The Blame Game: Who is the Real Culprit?
Ambarella believes that ongoing sluggishness in wearable camera market, especially action sports cameras in the U.S., is the main headwind for its growth. Of late, sales of GoPro’s Hero action cameras, powered by Ambarella chips, has been facing prominent decline in the U.S., which in turn, is primarily led by the company’s reluctance to launch any new cameras this year.
Moreover, Ambarella previously blamed GoPro’s untimely launch of Hero+ LCD and Hero4 Session cameras in June and July, as an ill-devised scheme, citing that a more strategically timed launch prior to the holiday season could have generated more enthusiasm among consumers. Echoing similar sentiments, majority of analysts opined that absence of any potential game-changing launch, intensifying competition from smartphones and lackluster performance of Hero4Sessions are adding to GoPro’s woes.
No Respite in Sight
In addition to the softness in the wearable market, a recent analyst note released by Morgan Stanley indicates that darker times are ahead for GoPro. Morgan Stanley spokesperson Katy Huberty commented that GoPro’s fourth-quarter sales might trend below its present forecast range of $500–$550 million. However, GoPro’s sour Christmas sales are in sharp contrast with wearable fitness-tracking devices manufacturer Fitbit Inc. FIT, who continues to witness a robust hike in online sales.
Moreover, she added that if the Black Friday Weekend was an indication, no promotional offers or “increased sales/marketing spend” that can bolster camera sales are in sight. This implies panic-selling of GoPro’s shares will likely continue, and if sports action cameras fail to rebound, the shares will probably see further beating.
Currently, GoPro holds a Zacks Rank #5 (Strong Sell). A better-ranked stock in the industry is Harman International Industries, Incorporated HAR, carrying a Zacks Rank #2 (Buy).
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