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GoPro: Why A Merger With Ambarella Is Vital

GoPro's (NASDAQ:GPRO) Q3 earnings and guidance for Q4 point to increasing pressure from competitors large and small. By itself, GoPro's technology moat is not particularly wide or deep. A combination with Ambarella (NASDAQ:AMBA) is much more formidable. GoPro is in many ways an integrated mobile device company like Apple (NASDAQ:AAPL), and like Apple GoPro needs to take control of the semiconductor heart of its devices in order to assure lasting advantage.

Competitive Pressure

GoPro Q3 revenue came in well below expectations, at $400.3 million, 8.5% below the midpoint of guidance. But the y/y change of 43% was still impressive as was the over 100% y/y increase in GAAP operating income to $27.64 million.

GoPro management was at pains to explain the revenue miss based on incorrect positioning of the Hero 4 Session and subsequent expense due to a price protection guarantee when the Session was repriced.

This all makes sense for Q3, but the guidance for Q4 blindsided investors. As described by CFO Jack Lazar in the conference call, GoPro expects Q4 revenue to be 17% below last year at the midpoint of the guidance range of $500-550 million.

In the wake of the 15% drop in the stock that followed GoPro's earnings report, supporters of GoPro seem to be somewhat at a loss to explain the guidance. SA contributor Joe Albano believes that it's a carry over from the Session impact on Q3. L&F Capital simply reiterated that the action camera market is expected to grow at a 22% CAGR to 2019, but did note that GoPro could lose market share.

The Session explanation should make investors more than a little uncomfortable. Even if the Session is a dud in the marketplace, GoPro still has its existing line up of cameras. Lazar noted that going into Q4 channel inventory was "at target" with the exception of the Session and the Hero+LCD.

Lazar also stated that revenue visibility for Q4 was "less clear" due to the lack of a product launch. What is this saying? First, it says that GoPro was expecting the Session to carry the ball as a new product to stimulate demand in Q4, and that now they don't. Second, it says that GoPro needs a successful new product launch just to maintain revenue at or above the year ago level.

Given L&F's assumed CAGR for the market, the only way this Q4 expectation makes sense is if competitors are taking market share from GoPro. And GoPro has many competitors. Amazon is awash with cheap Hero knock-offs. These probably have little effect, but traditional camera companies are starting to offer more direct competition as I predicted...