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Actionable news in AMBA: Ambarella, Inc.,

Start Accumulating Ambarella

Summary

Ambarella's stock has been punished for the problems of a big client.

Most of that is behind us, and the shares have sold off 70%+ and are now very reasonably priced.

So far, the company has been dealing well with competition and it seems well-placed for a number of high growth markets.

Ambarella (NASDAQ:AMBA), a company that produces high-end video processing chips and solutions, is a former high-flyer. Consider the chart:

From a top at almost $130, the stock has crashed to $35 at the moment of writing. That's more than a 70% crash. The reason for this is no secret either, it's the decline in sales of GoPro (NASDAQ:GPRO) action cameras, Ambarella's most important client.

The GoPro stock has crashed even more, from nearly $100 to under $9 as revenues have crashed:

You see that Ambarella's revenue hasn't crashed anywhere near the same magnitude, and Q4 is a seasonal low market; revenues were still up 5% from Q4 2014, despite a substantial decline in revenues from the wearable camera market due to GoPro.

Fiscal 2016 (February 2015-February 2016) still provided a stellar result, though. Revenues grew by 44.9% to $316.4M and non-GAAP net income grew a whopping 73.3% to $111.6M. The company also added $123.6M in cash from operations.

The important Q1 figures have still to come but it's important to note what the company has said about Q1 (from the Q4CC):

we expected a moderate decline in Q1 year-over-year revenues due to inventory adjustments at GoPro. Since that time, the actual demand from GoPro is expected to decline to the low single-digits as a percent of revenue in Q1, with the likelihood that this weakness will continue at similar levels until the launch of any new products with our chip... as a result of expansion of our other wearable camera business, our Q1 wearable revenue should remain in the mid-teens as a percent of total Q1 revenues.

The emphasis is ours. Now, on Wednesday May 12, the stock tumbled a further 7.5%, seemingly on this:

Pacific Crest cut its price target on the shares to reflect slumping demand for the action camera brand, which the research firm argued has led to "massive," ongoing inventory corrections. RESETTING MODEL: Pacific Crest analyst Brad Erickson cut his price target on Ambarella to $53 from $62 this morning to reflect "massive" GoPro inventory corrections amid weaker demand for the action cameras.

Note a few things:

  • We are inclined to say that this is old news. The 70%+ crash in the share price can be almost entirely ascribed to this problem.
  • What's more, how much damage can GoPro still do when it has shrunk as a customer to only the low single-digits as a percentage of revenue?
  • What's more, the company itself expects the wearable camera market to "remain in the mid teens" so a decline in GoPro sales is expected to find compensation elsewhere.

And then of course the figures from GoPro's first quarter are already out. While the company missed on earnings, they actually beat on revenue (by $14.46M).

And while their supposedly revolutionary drone product, the Karma, was delayed until the second...


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