Expectations are high for camera-on-a-chip firm Ambarella (AMBA), as the company heads toward its second-quarter earnings report on Sept. 1. Wall Street is expecting Ambarella earnings to more than double to 81 cents per share, with sales forecast to rise 74% to $81.73 million.
With AMBA’s stock price at oversold levels following the market correction, now may be an excellent time to jump on shares ahead of next week’s event.
Fundamentally, Ambarella earnings have a strong track record for topping Wall Street’s estimates. In fact, the company has beaten the consensus estimate in each of the past 10 reporting periods, with an average upside surprise of 52% compared to Wall Street’s targets. Indeed, EarningsWhisper.com reports that the second-quarter whisper number for Ambarella earnings comes in at 86 cents per share.
Running with this bullish vibe, the brokerage community is considerably optimistic when it comes to Ambarella’s prospects. According to data from Thomson/First Call, AMBA stock has earned eight “buy” ratings, five “holds,” and no “sell” ratings. Furthermore, the 12-month price-target of $110 represents a 22% premium to Friday’s close.
That said, not everyone is on the bullish bandwagon. Despite a 4% decline in AMBA short positions during the most recent reporting period, some 8 million shares of AMBA stock remain sold short. These shorted shares represent more than 28% of AMBA’s total float, and could provide ample fuel for a sizable short-covering rally.
Still, if the decline in short-interest is any indicator, short sellers are feeling a bit nervous at the moment. This sentiment is all but confirmed when we look at AMBA’s options backdrop. For instance, the September put/call open interest ratio for AMBA stock comes in at 0.58, with calls nearly doubling puts among options set to expire by the end of month.
What’s more, the weekly Sept. 4 series put/call ratio dips further, arriving at 0.5. The popularity in short-term calls is either a sign that options traders are expecting a big move from AMBA stock post-earnings, or a sign that short sellers are loading up on calls as a hedge against an upside move. Either way, it’s a rather bullish indicator for the equity heading into next week’s earnings report.
Click to Enlarge Overall, implieds for weekly September 4 series options are pricing in a rather sizable 13.27% post-earnings move for Ambarella stock. Thus, the upper bound sits at $102.94, while the lower bound lies at $79.06.
A breakout to the upside could see additional buying as AMBA tops the $100 mark and sends short sellers scrambling to cover. A decline, meanwhile, should see limited follow-through due to support at AMBA’s 200-day moving average.
2 Trades for AMBA Stock
Call Spread: With solid fundamentals, a potential short squeeze, and oversold technicals, the path of least resistance for AMBA appears to be to the upside. Traders looking to take a chance and place a bet big on AMBA ahead of earnings might want to consider a Sep $95/$100 bull call spread.
At last check, this spread was offered at $2.34, or $234 per pair of contracts. Breakeven lies at $97.34, while a maximum profit of $2.66, or $266 per pair of contracts, is possible if AMBA stock closes at or above $100 when September options expire.
Put Sell: For those more cautious traders, a deep out-of-the-money put may be just the way to bank a little profit while relying on technical support. At last check, the weekly Sep 4 series $76 put was bid at 95 cents, or $95 per contract.
As long as AMBA trades above $76 through the close of trading next Friday, traders will keep the premium received. If Ambarella trades below $76 ahead of expiration, however, traders could be assigned 100 shares of AMBA stock for every put sold at a cost of $76 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
