Accumulating Ambarella on the Pullback Is a Bad Idea

Ambarella (AMBA) has been a terrific performer in the last few months as the stock has rallied almost 90% since it declared a good Q1. Ambarella maintained its streak as it reported another quarter in which it surpassed analysts’ estimates. In Q2FY16, the company shared earnings per share of $0.54, $0.16 greater than the estimates. Revenue for the quarter came in at $65.10 million, surpassing the estimates by $0.82 million.

Despite beating on both fronts, Ambarella tanked over 6% post earnings. Ambarella’s revenue witnessed a drop of 22 percent year-over-year.
Ambarella detailed that the drop in revenue was mainly due to the weakening wearable sports market, but it is observing a near-term recovery in its China IP security camera business as are subjected to positive design win momentum in all of its prevailing market divisions.

As a matter of fact, GoPro accounts for the most significant customer of Ambarella. According to the estimates from Pacific Crest, orders from GoPro will account for approximately 25 percent of the company’s overall revenue this year. However, GoPro’s sales are projected to drop 15 percent this year, and this will surely have a negative impact on Ambarella also.

The reason behind the slowdown is that GoPro has not released any new flagship Hero cameras to get ahead of its popular Hero 4 Silver and Black devices from late 2014.
Accumulating Ambarella on the Pullback Is a Bad Idea
Image by geralt / Pixabay
In its place, the company sold various other low-mid range cameras in 2015 as a weak endeavor to appeal to mainstream users. However, GoPro’s strategy didn’t really work.

Moving onward, GoPro is on its way to introduce its new Hero 5 camera as well as the Karma drone during the holiday quarter. If sales for both the devices are robust, Ambarella could achieve an additional strong boost at the end of this year. Moreover, GoPro believes that the action camera market will likely make progress in the prevailing half of this year, and this could be good news for GoPro as well as Ambarella.

Conclusion

Ambarella had rallied strongly in the three months prior to its Q2 earnings report. The stock’s valuation has become stretched and although things are expected to improve for GoPro in the coming months, I think all the positives are already priced in Ambarella’s stock. As a result, I think investors should consider buying Ambarella on the pullback as the upside at these levels is pretty limited, and a worse-than-expected quarter can push Ambarella to the sub $40 levels once again.
Published on Sep 7, 2016
By Prudent Investor

Copyrighted 2016. Content published with author's permission.

Posted in ...