Ambarella is Misunderstood and Undervalued

Ambarella (AMBA) shares have been hammered ever since Citron Research gave the stock a long-term price target of $40. Although Ambarella is currently trading about 40% higher than Citron’s price target, I think the stock is about 50% lower than 52-week highs. The stock fell considerably yesterday following Barron’s negative article.

Although there’s a lot of negative sentiment around Ambarella, due to the falling sales of GoPro, I think the stock is undervalued and can move higher. Ambarella’s earnings are due in the first week of December.
The short interest in the stock is currently very high and so is the probability of a short squeeze as I expect the company to report a good quarter.

Analysts are expecting Ambarella to post EPS $0.86, $0.18 higher than the corresponding quarter of FY2015. On revenues front, analysts are modeling for 37% growth as the company is expected to rake in $90 million in sales.

Negativity already priced in

Despite the double-digit expected growth of the stock, the company is trading at 23x trailing earnings. A company with such growth prospects usually trades at a P/E ratio of 30x. Thus, I think Ambarella is undervalued and even if the company reports a mildly disappointing earnings report, I think the stock has about 20% upside going forward.

All the bad news is currently baked-in Ambarella’s current stock price, which is why I think investors can buy Ambarella going into earnings. The stock currently has a short interest of 44% and even the smallest bit of positive news can push the stock higher. The company also didn’t make any pre-earnings announcement which signifies that the company’s business may be performing better-than-expected. Thus, given the volatility, I think Ambarella’s stock is a buy going into earnings.

Not Completely Dependent on GoPro

Ambarella has been on the receiving end of a lot of bad press due to its partnership with GoPro. GoPro’s business is struggling and as a result shares of Ambarella have also underperformed.

What bears ten to forget is the fact that a major portion of Ambarella’s revenue comes from other clients, both in the U.S. and abroad. The company has a diverse business, which is why I think the company set the earnings date without any warning. I’m confident that the company’s earnings will be in-line in this quarter. The company is gaining traction in a lot of other markets and is a good long-term option for investors.


Ambarella’s stock is misunderstood due to the company’s ties with GoPro. However, the company has a diversified business model that will help it offset the slowing sales of GoPro’s camera. The stock has extremely high short float that makes it prone to a major post-earnings short squeeze. Hence, I think Ambarella is a buy going into earnings.
Published on Dec 3, 2015
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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