While Ambarella (AMBA) isn’t the most dominant player in the HD camera-on-a-chip market, it does have one of the most important customers in the wearable-camera field: GoPro (GPRO), which currently accounts for about 35% of Ambarella’s total business.
In fact, GoPro will be a major factor in the first-quarter Ambarella earnings report, due out after the bell Tuesday.
Diving into the numbers, Wall Street is projecting large year-over-year gains for Ambarella. Q1 earnings are seen surging 132% to 58 cents per share of AMBA stock, while revenue is expected to spike nearly 64% to $67 million.
Given GoPro’s April announcement that second-quarter revenue could come in 17% above Wall Street’s expectations, Ambarella should be on pace to eclipse consensus targets as well. As a result, EarningsWhipser.com reports that the Q1 whisper number for Ambarella earnings is a whopping 65 cents per share. (And historically, Ambarella has topped even whisper numbers in every quarter for the past two years!)
Despite this strong fundamental backdrop, pessimism reigns in Ambarella’s sentiment outlook
For instance, the brokerage community remains wary of AMBA stock. According to data from Thomson/First Call, five of the 12 analysts following AMBA stock still rate the shares a “hold” or worse. Furthermore, the 12-month consensus price-target of $75 represents a roughly 20% discount to Friday’s close at $90.21.
Meanwhile, the number of AMBA shares sold short rose by 3% during the most recent reporting period. As a result, some 7.4 million shares of Ambarella stock are now sold short, accounting for a whopping 26.6% of the stock’s total float, or shares available for public trading.
This is clearly ample fuel for a potential short-squeeze situation for AMBA stock.
Even options traders are jumping on the bearish bandwagon for AMBA stock. Currently, the June put/call open interest ratio for AMBA rests at an elevated reading of 1.14, with puts easily outnumbering calls among options set to expire within the next month. This ratio moderates a bit when looking at the weekly June 5 series, coming in at 0.71, but still reflects heavy pessimism ahead of a quarterly earnings report.
Click to Enlarge Overall, weekly June 5 series implieds are pricing in a potential post-earnings move of about 8.6% for AMBA stock. This places the upper bound at $97.70, while the lower bound lies at $84.93.
Technically, Ambarella has been on a tear and is up nearly 35% since the company’s last quarterly report. A post-earnings would push AMBA stock further into all-time high territory and could put pressure on short sellers, while a selloff should find support near AMBA’s 10-day moving average and the $80 region.
2 Trades for AMBA Stock
Call Spread: With strong long-term price action, solid fundamentals and a wealth of negative sentiment, AMBA stock has a near-perfect setup for a contrarian options play ahead of earnings. Those traders looking to bet against the sentiment grain might want to consider a June $95/$100 bull call spread.
At last check, this spread was offered at $1.29, or $129 per pair of contracts. Breakeven lies at $96.29, while a maximum profit of $3.71, or $371 per pair of contracts, is possible if AMBA stock closes at or above $100 when June options expire.
Put Sell: For those more cautious traders, a deep-out-of-the-money put might be just the way to bank a little profit while relying on technical support. At last check, the weekly June 5 series $80 put was bid at 50 cents, or $50 per contract.
As long as Ambarella trades above $80 through the close of trading this Friday, traders will keep the premium received. If AMBA trades below $80 ahead of expiration, however, traders could be assigned 100 shares of AMBA stock for every put sold at a cost of $80 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
