Why It's Time to Sell Ambarella

Ambarella (AMBA) stock has rallied strongly since the company beat Q1 earnings estimates. While the beat was impressive, I think bulls have taken the rally too far. Ambarella is scheduled to report Q2 earnings next month, and I would recommend investors to sell the stock before it. Ambarella will likely face some selling pressure in the coming months as most of the positive news is already baked in the current share price. Moreover, the company’s diversification into the drone market may also fail due to new drone rules by the Department of Transportation and the Federal Aviation Administration.

GoPro results already baked in

Against all expectations, GoPro (GPRO) reported a good quarter last month.

The positive earnings report saw the shares of both GoPro and Ambarella jump considerably. However, as I have already mentioned, Ambarella’s recent rally has priced in all the possible future tailwinds, and the stock doesn’t have much room to run higher.

Although Ambarella may deliver a strong quarter, I don’t expect the stock to head higher due to its valuation. The risk/reward ratio is unfavorable for Ambarella longs at this point in time, which is why I think selling the recent rally would be a wise decision.

Drone rules may restrict growth

Ambarella has been trying to distinguish itself from only being a GoPro supplier. Despite the fact that Ambarella has a diversified revenue source, the stock’s movement often depends on the success of GoPro.

Ambarella has been trying to tap into the drone market in an attempt to further diversify its revenue stream. However, The DoT and the FAA have issued final rules covering the use of drones in the U.S. Main points are that drones must weigh under 55 pounds and remain within a pilot's line of sight.

In addition, rules also restrict the maximum ground speed to 100 mph and pilots are strictly advised not to fly under a covered structure. Further points include:

These rules will make the commercial use of drone irrelevant and will also vastly reduce the size of the consumer market. As a result, Ambarella’s big bet on drones is likely to end in a disaster.


Due to the reasons mentioned above, I think investors should avoid the stock especially after the recent rally. The company’s diversification efforts will not be fruitful and the stock is likely to face selling pressure at current levels.
Published on Aug 2, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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