Ambarella: Don't Say I Didn't Warn You

In my last Ambarella (AMBA) article that was published just a day before the company’s Q3 earnings report, I predicted that the company will easily beat the Street estimates on revenue as well as earnings. The chipmaker’s EPS and revenue came in at $1.08 and $93 million. Both the figures were way ahead of the analysts’ estimates as the consensus was modeling the company to post EPS of $0.80 on revenues of $90 million.

Ambarella recorded significant earnings and revenue growth. However, the company’s shares moved downwards due to the weak guidance.
Ambarella is guiding for FQ4 revenue of $65 million-$67.5 million, below a $76.3 million consensus. I explained my concern about Ambarella’s guidance in my previous article. In fact, I cited weak guidance as the reason why Ambarella’s shares will tread downwards following earnings and that’s exactly what happened as the stock lost almost 10% of its value post-earnings.

Ambarella may be a diversified company, but the company’s business with GoPro is suffering. Hence, despite the chipmaker’s multiple revenue streams, it will continue to struggle and possesses about 20% downside potential from the present value.

GoPro’s fad may have helped both the aforementioned company’s last year. However, the trend is slowly dying and I expect GoPro’s sales growth to slow down rapidly in the near future. As a result, Ambarella’s business will suffer.

Although I have already recommended shorting both of these stocks multiple times in the past, I think investors should still stay away from them as more downside is imminent. Ambarella is more than 50% off from its all-time highs, but the stock can fall to $40 in the foreseeable future, making it a short pick.

GoPro, on the other hand, is still about 15% higher than my $15 price target, so I would recommend readers to hold their short positions.

Conclusion

With GoPro’s sales expected to slow down drastically, I think investors should bet against Ambarella. Although the stock has fallen considerably from all-time highs, I think there’s still time to short the stock. The company’s presence in the niche markets will not help it offset the falling sales of GoPro’s cameras, which is why I think more downside is inevitable. All things considered, I think investors should short Ambarella till the stock reaches early-to-mid forty.
Published on Dec 8, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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