Ambarella is Misunderstood and UndervaluedAMBA) 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.
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, 2015By Yaggyaseni Mittra