Better Buy: GoPro, Inc. vs. Ambarella

Like it or not, GoPro (NASDAQ: GPRO) and video-processing chip specialist Ambarella (NASDAQ: AMBA) are inexplicably tied to one another in the minds of many investors.

On one hand, business from GoPro formerly comprised 30% or more of Ambarella's revenue in any given quarter. On the other hand, any weakness from GoPro meant Ambarella would feel the pinch, which is why the video-processing chip specialist has worked hard to diversify its revenue base.

But on the heels of both companies' latest quarterly reports -- GoPro announced in early August, with Ambarella following a few days ago -- which stock is the better buy today? Let's dig deeper to find out.

GoPro on regaining sustained profitability

Shares of GoPro are still down more than 36% over the past year after the company made a series of missteps last fall, including the recall and relaunch of its Karma drone, and production issues that crimped sales of its newer HERO5 cameras during the crucial 2016 holiday season. Now, however, GoPro has its lenses focused on executing a turnaround.

As of GoPro's most recent report a month ago, things appeared to be progressing well to that end. Shares popped nearly 20% in a single day after GoPro confirmed second-quarter revenue had climbed more than 34% year over year to $296.5 million, helped by an 18% increase in global sell-through of cameras. Karma also secured its spot as the second best-selling drone brand in the country.

On the bottom line, GoPro continued to lose money. But it also cut its adjusted net loss to "just" $12.9 million, or $0.09 per share, narrowed significantly from a net loss of $72.6 million, or $0.52 per share in the same year-ago period.

What's more, GoPro is set to launch its new Fusion spherical camera and HERO6 flagship line later this year -- presumably in time for the 2017 holiday season.

"GoPro is building momentum," added company founder and CEO Nick Woodman. "[A]nd we continue to track toward our goal of full-year, non-GAAP profitability in 2017."

Ambarella sends mixed signals

Meanwhile, Ambarella finds itself in a decidedly different situation today. Shares plunged more than 20% after the company delivered relatively strong fiscal second-quarter results of its own -- revenue rose 10% year over year to $71.6 million, and adjusted net income of $0.48 per share was comfortably ahead of consensus expectations -- but followed by reducing its full-year outlook.

Excluding revenue from GoPro, where high inventories in recent quarters have hurt Ambarella's growth, Ambarella's revenue rose an impressive 16.3% year over year to $67.9 million. Ambarella credited both its professional and home monitoring-camera markets, as well as OEM automotive customers, for its beat. But Ambarella also saw weakness in the drone market, where Tier 2 customers are increasingly choosing other solutions and lower-priced flying cameras are crimping sales of premium drones.

As for the outlook, Ambarella says its drone weakness is expected to persist, at least in the near term. Combine that with lower-than-expected growth from the virtual-reality market, as well as a memory components shortage that could possibly impact camera build schedules for some customers, and Ambarella felt it was prudent to adjust its expected non-GoPro revenue growth for the full year to a range of 9% to 12%.

To be fair, Ambarella simultaneously gave investors something to look forward to in its new computer-vision chip, CV1, which will be sampled at leading customers toward the end of this fiscal year.

"We see computer vision as a key differentiator for us in camera markets," added Ambarella CEO Fermi Wang, "including automotive, IP security, drones and robotics, and it is our key area of focus for the future."

The verdict

Interestingly enough, Ambarella also noted that stronger-than-expected sales to GoPro should help partially offset the aforementioned headwinds in the second half of its fiscal year. However, with the caveat that I love Ambarella's longer-term vision for harnessing the power of computer vision to drive growth, I think that company has all but confirmed that right now, GoPro has momentum on its side.

Given the strong showing from GoPro's existing product portfolio, key new products on the way, and the assumption that those launches go off without a hitch, I think -- even after its recent pop -- GoPro stock is the better buy today.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.