Is Ambarella a Contrarian Buy?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.
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.
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.
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, 2015By Akshansh Gandhi