Why GoPro Won't Switch From Ambarella to Qualcomm

By Markets Fool.com

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Ambarella Inc. may have kicked off its latest fiscal year on a high note with its stronger-than-expected quarterly reporton June 2, 2016, but that won't stop investors from worrying about the looming threat of competition.

The rumor mill began to spin again late this week as various electronics news outlets reiterated speculation that key Ambarella customer GoPro might be mulling whether to switch to a competing chipset from chip juggernaut Qualcomm in its widely anticipated HERO5 cameras later this year.

That would certainly be painful for Ambarella considering business from GoPro in the past has comprised as much as 30% of annual revenue. But to be fair, Ambarella's overreliance on GoPro has technically taken its toll already. As demand for GoPro's current HERO4 line has waned and resulted in a painful inventory glut in recent months, before last week Ambarella had blamed the wearable camera segment as a primary culprit for its own weak guidance in each of its threepreviousquarterlyreports.

However, I don't think GoPro will be switching to Qualcomm's chips in the near future. In fact, at this point, I'm afraid making the switch wouldn't be in GoPro's best interests, either.

That's not to say Qualcomm isn't trying. But consider the words of Ambarella CEO Fermi Wang during his company's conference call three months ago:

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So in fact we know that the Qualcomm are talking to our customer. But we don't see them making much progress with camera solutions. In fact, we still believe that their current ad processor base solution is quite behind video quality, compression efficiency, power consumption, video features and performance. [...]I believe Qualcomm will try to come to compete, but I think we're ready.

Then again, a lot can happen over the course of a single quarter in our fast-paced world of technology. But again according to Wang last week, "the Qualcomm competitive landscape didn't change that much" last quarter -- though he did note Qualcomm has continued efforts to find its products a home with Ambarella's customers in the drone market.

Of course, that Qualcomm's current camera processor base lags Ambarella in terms of technology doesn't preclude it from winning a coveted spot in GoPro's HERO5 line, especially if Qualcomm is able to offer a cheaper solution and save GoPro money in the process.

But even then, I have a hard time believing GoPro -- which considers consumers' positive perception of its premium brand as paramount to its long-term success -- would be willing to settle for a "good enough" video processing chip at the heart of its latest and greatest camera technology. Even if switching to Qualcomm did help boost GoPro's margins in the process -- a benefit the company could certainly enjoy given its own top- and bottom-line declines in recent quarters -- I think the risk of tainting its premium image by using a technologically inferior video processing chip would be too great to ignore.

At the same time, as Wang pointed out last quarter, we can be sure Qualcomm will continue to improve its technology in an effort to "try to come to compete." But Ambarella shareholders can take solace knowing their company isn't resting on its laurels and continues to invest heavily in research and development (up 47.5% year over year last quarter, to $24.5 million, despite seeing revenue decline 19.5%, to $57.2 million over the same period) to ensure it maintains its competitive edge.

Meanwhile, Ambarella predicted it would benefit from a rebound in the wearable camera space in the second half of the year -- hardly something any reputable tech company would indicate if it were about to lose its single largest customer in the industry.

In the end, between Ambarella's comments on competition, an impending rebound in wearable camera space, and the potential threat switching could pose to GoPro's brand, I would be shocked if GoPro's HERO5 line includes a Qualcomm chip.

The article Why GoPro Won't Switch From Ambarella to Qualcomm originally appeared on Fool.com.

Steve Symington 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.