Ambarella: a Strong Buy Before Earnings

Chipmaker Ambarella’s (AMBA) fall from the top has been pretty remarkable. Less than a year ago, the stock was trading at over $120. The valuation was probably driven by the GoPro (GPRO) hype. And since the burst of the GoPro bubble, Ambarella has lost roughly two-thirds of its value.

Ambarella is expected to report its earnings today, and I think it makes for a great long trade. Given the fact that Ambarella is a beaten-down stock and the estimates for it are pretty low, the chances of the company reporting a better-than-expected quarter are really high.
A remarkable quarter can send the shares rallying, which is why I think investors should be on the long side of the trade heading into earnings.

Street Estimates

Wall Street analysts are expecting Ambarella’s sales to fall almost 20% on a year over year basis to $57 million. On the earnings front, analysts are expecting Ambarella to post a profit of $0.28 per share. By comparison, Ambarella’s EPS was $0.71 in the year ago period.

Clearly, Ambarella’s business has faced some difficulties, which is why both its earnings and revenue are expected to take a big hit. Nevertheless, it seems like the Market has priced in those concerns as Ambarella’s current valuation seems a bit conservative. With a forward P/E of 14, Ambarella is not as expensive as it once was.

Ambarella’s current estimates have priced in the GoPro concerns, however the company also supplies to various other firms that can help it offset this loss. For instance, sales of TASER’s Axon Body 2 were very strong as the company reported a strong quarter. This should help Ambarella beat the estimates when it reports today after market close.

Ambarella is also entering several high growth markets. Long-term investors should keep close tabs on Ambarella’s success in the drone and VR market. However, this article is only focused on trading the stock around earnings.

Final Words

Due to the reasons mentioned above, it is highly probable that Ambarella will report a great quarter, beating the analysts’ estimates on earnings as well as revenue. Since the stock has fallen close to 70% from its 52-week high levels, an earnings beat could cause a massive surge. Consequently, traders should be looking to get long, or buy call options before Ambarella reports Q1 report today. On the contrary, long-term investors should probably stay away from the stock for the time being.
Published on Jun 2, 2016
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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