Ambarella’s Rally Looks ExaggeratedAMBA) relief rally was long overdue. The rally was kick started by Ambarella’s better-then-expected quarterly results.
Although the rally was long overdue, I think investors may have taken it a bit too far. The threats to Ambarella’s business still exist and one quarter has not changed that. The stock has rallied over 30% since the earnings, which seems a little exaggerated to me. As a result, I expect Ambarella’s rally to fade out soon and the stock to return to the sub $40 levels in the coming months.
After the recent rally, Ambarella is grossly overvalued, which is the primary reason why I would suggest investors to use the recent rally to book profits.
If you were to draw a conclusion based on Ambarella’s valuation, you’d say that it is a growth stock. Not just a normal growth stock, but a company that is expected to report 20%+ sales growth for at least two years.
However, in Ambarella’s case, the reality is far away from its fundamentals. According to Yahoo! Finance, Ambarella’s revenues are expected to dip by 24% in the current quarter. The company’s annual sales are expected to decline 2.6% as well. Moreover, the company’s earnings have fallen of a cliff as well. Ambarella reported EPS of $0.38 in the latest reported quarter, as compared to $0.88 in the corresponding quarter of the previous year.
Given the “growth” estimates, it is obvious that Ambarella can’t sustain its current valuation and the recent rally will likely fade out in the weeks to come. Thus, I think investors should use it to book profits.
There is no way Ambarella can continue trading at the valuation of a growth stock when the company’s revenues and earnings are in a downtrend. Although Ambarella’s sales may consolidate soon, it should be reporting over 20% growth in annual sales based on its valuation. The company is nowhere near its target.
Fundamentals will eventually catch up with reality, and investors should exit the stock before it happens. At current levels, buying, or even holding, Ambarella makes little sense as the upside is pretty limited. The risk/reward ratio is unfavorable for investors, which is why I think investors should look to exit the stock as soon as possible.
Published on Jun 27, 2016By Prudent Investor