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The "Backdoor" Way to Play the Looming GoPro IPO

In a special report and several columns earlier this month, we showed you three "back-door" strategies to play the biggest IPO in history – the initial-public-stock offering of China Internet giant Alibaba Holdings Inc.

We're now hearing that the Alibaba stock offering is scheduled for the early part of August. So you can bet that we'll be watching that deal for you.

In the meantime, we have another "back-door" move for you to make.

And it's on another "hot" IPO.

The stock offering in question is the looming IPO of GoPro Inc., maker of the hugely popular wearable cameras used by "extreme" sports enthusiasts, skiers, sky divers and motorcyclists, to name a few. GoPro filed its prospectus early this week, giving investors their first really detailed view of the company that makes the "Hero" camera line.

Like Alibaba, we're expecting the GoPro deal to be a really hot offering – meaning individual investors will have a very tough time getting a piece of the deal.

But there's another way to benefit.

And it's a company whose long-term prospects we like even better.

I'm talking about Santa Clara, Calif.-based Ambarella Inc. (NasdaqGS: AMBA), the maker of high-resolution imaging chips and a company whose stock price more than doubled in just a few short months after we recommended it to you back on Aug. 8. We recommended the stock at $16.60 a share – and it zoomed to $36.49 by early January, a gain of 120% in just five months.

Ambarella's shares have slipped a lot since then, but we still have a 51% gain in hand. And we've been saying all along that we expected a big rebound.

The GoPro IPO should serve as a nice catalyst.

Here's why …

Image of a Winner

We've always liked Ambarella's long-term prospects. But the looming GoPro IPO is stepping up investor interest in Ambarella's shares in the near term.

And it's easy to see why: GoPro's business is booming.

The company's sales zoomed 125% in 2012 and another 87% last year to reach $985.7 million. And unlike many soon-to-go-public tech IPOs, GoPro actually makes money: Earnings jumped 31% on a year-over-year basis for 2012, and advanced 88% last year.

What's ironic is that GoPro probably shouldn't even exist.

Founded by surfer Nick Woodman (now the company's CEO) back in 2004, GoPro managed to do something that many of its camera-making rivals – many of them much larger in size – couldn't pull off.

It survived.

As TechCrunch reported, "during the mass camera die-off of 2010-2011, small portable cameras and camcorders slowly suffocated in the oxygen-rich atmosphere that birthed the powerful phone camera. Hundreds of species were wiped out, most notably Kodak and Flip. But, crawling out of the mire as the air cleared, was GoPro. These cameras have survived by sheer force of will and thrive thanks to sports enthusiasts and videographers who want to slap a camera to a helmet or airplane wing. The resulting boost in sales has led to a $100 million IPO and countless sales."

As impressive as that is, GoPro faces some challenges. Growth seems to be slowing this year, and it's a bit of a "one-trick pony" – with its camera line, and not much else. It intends to start generating revenue from content – including from its immensely popular YouTube channel, but success there isn't assured and will take time to pull off.

Ambarella makes the video-compression chips that serve as the "brains" of the GoPro cameras. In fact, the chipmaker is GoPro's sole provider. That's good for Ambarella, because it can count on GoPro being a consistent buyer.

But unlike GoPro, Ambarella isn't a one-product wonder.

It has several businesses.

And they're all soaring …

Multiple Catalysts

As resident tech expert Michael Robinson and I told you in an analysis report back in January, Ambarella is marketing to the broadcasting industry, the auto sector and the global security sector. And they are all strong businesses. For instance:

  • Sales of wearable sports cameras – consisting mostly of sales to GoPro – are advancing at an annual pace of 59%.
  • Internet protocol (IP) security cameras, another alluring segment, are experiencing annual sales growth of 58%.
  • And sales of automotive cameras, a fairly new market (both of my parents' new Fords have really cool "backup" cameras), are seeing annual growth of 77%.

There's a reason Ambarella is seeing such strong demand for its chips: The technology is simply better than everything else out there. The "4K' image resolution the GoPro cameras boast are as good as professional broadcast cameras costing tens of thousands of dollars.

The Ambarella chips let users capture high-quality video with minimal distortion – a combination that's perfect for social-media platforms. The chips are power-efficient.

But the benefits don't stop there. Thanks to Ambarella's uber-cool software, consumers can use such remote devices such as tablets, phablets and smartphones to control the camera.

The current businesses are just the beginning.

Cisco Systems Inc. (Nasdaq: CSCO) is forecasting that mobile video will grow at a 90% annual pace – and will account for 71% of total mobile data traffic by 2016.

That will create all sorts of new opportunities for Ambarella.

Late last year, Ambarella and Google Inc. (Nasdaq: GOOG) revealed that they'd jointly developed a "wearable" camera for the Internet giant's new "Helpouts" video-training service. In the press release that made the announcement, Ambarella said the cameras would have a small "form factor" to allow for "complete mobility during a Helpouts session."

Then there's a new format in broadcasting.

Last summer, when we initially recommended in the Private Briefing report "How to Make a Fortune in Television," we did so because of our belief that the ultra-high-definition TV (UHDTV) market was poised to explode into a $3 billion business.

Michael, who runs our Radical Technology Profits trading service, said after this year's Consumer Electronics Show (CES) exhibition that UHDTV technology is on the verge of a "breakout" in the U.S. market.

This technology also is known as "4K" because these new, sharper-definition TV sets display 4,000 horizontal lines of video, making them roughly four times sharper than the images displayed on current high-definition (HD) TVs.

The Consumer Electronics Association (CEA) trade group that runs the popular annual CES predicted that just 23,000 UHDTVs would be sold in the U.S. market in 2013. But that figure will soar to 1.43 million sets, or roughly 5% of TVs sold nationally, by the end of 2016 – a sixtyfold increase.

NPD DisplaySearch has an even more aggressive outlook and sees nearly a sevenfold increase next year alone. NPD estimates that sales came in at 1.9 million for 2013 and predicts that sales will rise to 12.7 million in 2014.

And by 2017, UHDTVs will account for nearly one-fourth of all televisions of greater than 50 inches sold in the U.S. market, NPD projects.

But you won't have to wait until 2017 to start making money on this trend.

In a recent report – "Ultra High-Definition: State of the Industry" – the CEA said that once the sales rate reaches a million units a year, the market will zoom.

"That's clearly where we'll start to ramp" and will see the market go vertical, Brian Markwalter, the CEA's senior vice president of research and standards, told Investor's Business Daily.

To this point, there have been two major obstacles for a UHDTV expansion. The first is the price of the TVs themselves. And the second was the non-existence of content.

Prices will fall as production and sales of the new TVs ramp up – that's the nature of new-technology products.

And the content issue appears to be taking care of itself, too.

"At this year's CES, none other than tech giant Netflix Inc. (NasdaqGS: NFLX) put its support behind 4K technology," Michael said. "And this is a big deal: By putting its support behind 4K, Netflix is addressing the content issue that currently blocks mass adoption of UHDTV."

Netflix used CES to reveal its prospects for 4K video streaming by showing a "trailer" for the second season of its original series House of Cards – filmed in Ultra HD. The king of online video says it will stream the show in 4K beginning next month.

Netflix said it has forged partnerships with such major firms as Sony, LG, Vizio and Samsung to support the new format for mainstream broadcasts.

TV manufacturers like Sony and LG brought a wide range of new UHDTV sets to CES. And if you look at Sony's Website, you'll see numerous mentions of 4K video cameras, and new models of UHDTVs.

This will translate into some hefty sales-and-profit growth for Ambarella. By 2016, profits could more than double to $220 million.

This is a stock that's going to move.

And the looming GoPro IPO will jump-start that move very soon.

Have a great holiday weekend.

[Editor's Note: Unless otherwise directed, we recommend investors employ a 25% "trailing stop" on all holdings.]

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