Why You Should Avoid Ambarella Going into Earnings

Shares of Ambarella (AMBA), the high-definition video chip maker best known as the supplier behind wearable action cam-maker GoPro (GPRO), have staged a good recovery and have appreciated about 20% in the last few weeks. The chip maker is expected to report its Q3 earnings report on 3rd November. On a P/E basis, Ambarella looks conservatively priced. However, is the stock a buy going into earnings? I don’t think so and here’s why.

Ambarella will probably deliver better-than-expected results as analysts are expecting the company to report an EPS $0.86 on revenues of $90 million.
Both earnings and revenues are expected to witness double-digit growths and the Street estimates are within the company’s guidance range. Hence, it wouldn’t be a surprise if the company beats of earnings and revenue tomorrow.

However, it’s the company’s guidance I’m worried about. The company has a diversified business model, but the hype surrounding GoPro often takes a toll on Ambarella. GoPro has been underperforming for quite some time now as the sales of the company’s fad-driven cameras are slowing down. As a result, it is highly likely that Ambarella’s guidance will fall short of investors’ expectations, which is enough to stay away from the stock going into earnings.

In addition, the long-term prospects of the company don’t look too good either as increasing competition for GoPro will likely be a headwind for Ambarella as well. The risk of increasing competition is nicely highlighted in an article by etddailynews.com. The article states:

“The company has slashed prices 25% on its HERO4 Session camera, yet did not revamp its high-end product line. What’s more, the new Hero+, a mid-range camera with built-in Wi-Fi and Bluetooth features, may be a bust because it cannibalizes what would otherwise be high-end sales.

Sony and Ion are charging hard, and with market share that’s presently estimated to be 8% and 12%, respectively, according to Market Realist, that suggests GoPro’s 47.5% market share will drop. Apple has recently upgraded its phone to shoot higher-resolution video, and that has the GoPro fan club’s selfie sticks trembling.”

Ambarella’s success greatly depends on its ability to distinguish itself from GoPro. As of now, things don’t look good for Ambarella, which is why think the stock is a sell. I believe Ambarella’s stock has a lot of room to fall and the chances of the stock shooting higher after earnings are not that great. So investors should sell the stock going into earnings and if the stock shoots higher post-earnings, investors can use the pop to initiate a short position as the company’s long-term prospects don’t look too good.
Published on Dec 2, 2015
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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