GoPro Demand Is Steady, But Drones Are 'Literally Flying Off The Shelves,' PacCrest Says

Pacific Crest's Brad Erickson said the firm prefers Ambarella Inc (NASDAQ: AMBA) over GoPro Inc (NASDAQ: GPRO) at current levels.

While Erickson said that GoPro should both beat earnings expectations and raise guidance, the firm is less optimistic about future products. Erickson argued that "new products are unlikely to shake the bears, which could limit multiple expansion."

Those bear concerns are rooted in "market saturation concerns," which are unlikely to end given a "lackluster" response to new products. At current levels around $55.57, PacCrest sees the risk/reward between the bull ($80 stock price) and bear ($30 stock price) as roughly balanced.

Ambarella, however, not only has strong GoPro demand working for it, but also strong demand for drones. According to PacCrest's checks, Best Buy Co Inc (NYSE: BBY) has sold through all of its U.S. drone inventory, with "no timeline for replenishment."

Related Link: Piper Jaffray Says GoPro Has 'Favorable' Risk-Reward, Reiterates Overweight

While "valuation might appear rich," Erickson noted that the growth potential deserves a rich value.

"We remain buyers given multiple potential upside drivers in the form of GoPro, drones, IP video surveillance, police cameras and consumer IP cameras," the note said. Further, since Ambarella is a play on the overall action camera market, investors will see success no matter if GoPro or Xiaomi win the Chinese share.

Year-to-date, Ambarella has significantly outperformed GoPro. Ambarella is higher by 114 percent, compared with declines of 12 percent in GoPro. At one point, Ambarella was up 150 percent on the year, before coming off those prices sharply in June.