Earnings season is typically a tricky time for the market, which is why it’s more important than ever to remain focused on a company’s underlying fundamentals and avoid letting emotions get the best of you.
The company I want to talk about today is one that has a consistent earnings track record and a strong business model that has been recognized by analysts numerous times over the years. While there is some risk implied in its upcoming second-quarter earnings report, I like this company and expect to see it continue to outperform the market for years to come.
The company is Ambarella (AMBA), a leading developer of low-power and high-definition (HD) video compression and image processing solutions that are used in a wide variety of professional and consumer applications. These include security IP cameras, sports cameras, wearable cameras, and more. The company also produces compression chips that are used in broadcasting television programs around the world.
In fact, you may be more familiar with this company than you think — especially if you’ve ever used a GoPro (GPRO) camera. According to GPRO’s 2014 annual report, Ambarella is the company’s sole supplier of the video compression and image processing components used in every single one of GoPro’s cameras.
Prior to going public in 2012, Ambarella received the Global Semiconductor Alliance (GSA) award for “Most Respected Private Semiconductor Company” in 2010, 2011, and 2012. But, the awards didn’t stop after the company made its stock market debut. The company received the GSA 2013 award for “Favorite Analyst Semiconductor Company” and the GSA 2014 award for “Most Respected Emerging Public Semiconductor Company.”
Ambarella has a solid track record of beating estimates in its quarterly reports — it beat on the bottom line four of the last four quarters — and continued that trend in its most recent first quarter, reported on June 2. The company saw significant year-over-year EPS growth from $0.25 to $0.71 (analysts had been looking for just $0.59), and revenue also saw impressive growth increasing 73.5% to $71 million and beating consensus of $67.4 million. As a result, AMBA climbed steadily over the next few weeks, popping nearly 40% to a near-term high of $128.06 on June 18.
Second-quarter results are expected out after the close on September 1, and while the risks of the recent earnings season are certainly there, I have a good feeling that we’ll see another impressive beat. Presently, analysts are looking for earnings of $0.81 per share on revenue of $81.73 million.
The question of whether or not to buy ahead of earnings is a tricky one, especially considering how unpredictable the past few earnings seasons have been. But, given the company’s solid record, I think this may be an opportunity — although you should certainly take all of the risks into account. I would limit the size of the transaction.
The risks are high here, and amplified investor emotions have knocked down a lot of high-flying names recently, even on strong results. But, the shorts seem to be getting nervous here (I recently read a report from a firm I’ve never heard of that I’m convinced was planted by the shorts), which could result in some covering that sparks a move higher.
AMBA is currently trading about 17% from its all-time highs, which tells me that there is still plenty of upside left to capture. Longer term, I firmly believe we’ll see this company become the prime play on drones, camera chips, and technology in general.
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