Is Ambarella a Contrarian Buy?

Ambarella (AMBA) has received a lot of hate this year. The stock has crashed from roughly $130 to $55 is a span on a few months. Despite the massive plunge, Ambarella still has a large amount of people betting against it as the short float is very high. That said, I think Ambarella is a good contrarian buy going into 2016 and can prove to be a rewarding investment for long-term investors.

Conservative guidance

Ambarella reported its Q3 earnings earlier this month. Despite double-digit growth and beating the earnings and revenue estimates by a large margin, Ambarella’s stock took a beating as investors were spooked by the company’s slashed guidance.

Due to the weakness in the sales of GoPro, Ambarella slashed its revenue guidance for the upcoming quarter, as a result of which, the stock ended in the red despite reporting great numbers.
Ambarella has a pretty diversified revenue stream and I think investors overestimate the threat of GoPro’s sales slowing down. Hence, I think the stock is a contrarian buy.

Moreover, Ambarella has always been very conservative with its earnings and Q4 numbers will probably come in ahead of the company’s revised guidance. Ambarella has a history of giving conservative guidance, which is why I think investors shouldn’t worry about it and should instead focus on the long-term outlook.

Short Squeeze

As mentioned above, the short interest in Ambarella’s stock is very high. However, I strongly believe that the company will perform very nicely going forward, making it prone to a massive short squeeze. Although Ambarella will probably not reach $120+ levels it reached this year, it still possesses great upside potential. Given the amount of hate the stock is receiving right now, I think Ambarella is a perfect contrarian buy.


I think investors should only focus on Ambarella’s growth. Despite slashing guidance, the company’s earnings and revenue witnessed a significant year-over-year increase and I expect this growth to continue in 2016 as well. Despite the high growth, the stock is conservatively priced at is currently trading at only 21x trailing earnings. A growing at such a hectic pace should easily command a 30x+ P/E ratio.

Going by the company’s low P/E ration, I think the stock has about 30% more upside potential, making it a great buy at present levels. Hence, for the reasons mentioned above, I think Ambarella is a great contrarian buy going into 2016.
Published on Dec 11, 2015
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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