• GoPro shares have declined heavily Year To Day.
• The latest selloff was triggered by the light outlook issued by Ambarells, GoPro's supplier of video chips.
• Ambarella's weak guidance, however, was as a result of timing of the launch of several new GoPro cameras.
• GoPro shares are a good buy.

Shares of extreme action camera manufacturer GoPro (NASDAQ:GPRO) have been badly hammered this year. GoPro shares are down 46.7% YTD, with the latest selloff coming over the last couple of days after Ambarella (NASDAQ:AMBA), the company that supplies state-of-the-art video chips to GoPro, delivered mixed second quarter earnings and issued soft guidance. The weak report sent GoPro shares tumbling 22% in a matter of days.

Source: CNN Money

Ambarella’s Weak Guidance Caused The Recent Sell Off

What spooked investors about the Ambarella report was the company’s third quarter revenue guidance of $90 million-$93 million, the midpoint of which came in below analysts’ estimate of $93 million. GoPro is Ambarella’s biggest customer with Ambarella high-end chips being deployed in GoPro’s wearable cameras, broadcast infrastructure encoders, surveillance gears, and automotive dashboard recorders. Ambarella’s wearable cameras segment in particular was dismal, which led investors to suspect that GoPro sales might not be very impressive.

But it’s important to note that Ambarella did not pin the blame for the poor guidance on light demand for its chips, but rather due to GoPro’s timing of the launch of new HERO+ LCD and HERO4 Session cameras in the second quarter instead of the third quarter as the company has routinely done in the past.

The wild selloff in GoPro shares has led to the shares moving from overbought territory late last year to oversold currently. The shares currently sport an RSI reading of 10. An RSI reading below 30 indicates the shares are firmly in oversold territory and could be significantly undervalued.

GPRO Technical by amigobulls.com

Other than the technical side of things, there are a few more reasons why GoPro shares could be a good buy.

GoPro Trim+Share App for YouTube

In the midst of all the market maelstrom, GoPro launched the Trim+Share app that allows users of GoPro cameras to create short videos and share them on YouTube and Facebook (NASDAQ: FB). It normally takes hours of editing/cutting to make a nice video worth uploading even for expert users of professional video editing software. The new GoPro tool makes the process much smoother and faster.

Though the market did not make much out of the announcement, it could turn out to be a lot more compelling than meets the eye. GoPro has already garnered 3.1 million YouTube subscribers, with the subscriber base growing at 40% every year. GoPro videos are rapidly becoming very popular, with the number of videos published on its YouTube channel having grown 93% during the last quarter. Meanwhile, GoPro has 8.8 million Facebook followers with the subscriber base growing 16% Y/Y. GoPro is the fourth most popular brand on Instagram with close to 6 million subscribers.

With the new app, more GoPro videos will be published on YouTube and Facebook, the two largest video ad platforms on the planet. YouTube gives a 55% cut of ad revenue for videos published on the platform to content creators so there is a strong incentive for people to publish their videos on the platform. GoPro videos have a reputation for being high quality and these types of videos tend to rhyme well with marketers. The more people watch GoPro videos on YouTube and Facebook, the more inclined they will be to purchase GoPro cameras and use them to shoot their own high quality videos.

The new video tool follows shortly after GoPro launched a video licensing platform that people can use to upload their high quality videos which GoPro will license to marketers for a fee. The videos don’t come cheap, and rates start at $1,000. GoPro gets a cut of the revenue generated with the rest going to content creators.

High quality videos for use in ads are a hot commodity. YouTube brought in revenue of $4 billion for Google in 2014, and is set to become one of the key growth drivers for Google over the next couple of years. Indeed, Credit Suisse predicts that YouTube and Google Play combined will bring in 24% of Google’s revenue by 2020.

Higher valuation

GoPro reclassified itself as a full-media company just prior to its IPO, a move that helped its shares fetch a much higher valuation than what would otherwise be the case for a pure-play hardware company. But investors have been pointing out that more than 98% of the company’s revenue still comes from selling hardware. There is a possibility that GoPro might cross-sell videos on its own platform with those published on its YouTube channel thus creating a virtuous cycle for its products and brands. I project that in about three years at least 10% of GoPro’s revenue will come from its video ad platform and help ease investor concerns regarding the company being a one-trick pony.