Ambarella Stock: Wait for Sentiment to Recover Before Piling In (AMBA)

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Shares of Ambarella (AMBA), the HD video chipmaker and GoPro’s (GPRO) largest supplier, are taking a beating today, down as much as 15% in early trading. The beating comes on the heels of Ambarella’s second-quarter 2016 earnings report late yesterday.

ambarella-inc-amba-stock-185-2AMBA stock was already off 6% on Tuesday, a victim of yesterday’s overwhelmingly bearish market, which punished smaller growth stocks like Ambarella disproportionately.

Now trading around $77 a pop, AMBA hasn’t traded this low since May.

I’m not a fan of trying to catch a falling knife, so if you’re trying to time the bottom, I wouldn’t buy Ambarella stock today. But it is still a great company, and once we get some clarity on where AMBA has some resistance, this stock will be a great buy.

Earnings, Revenue: Great! Guidance … Meh

You’d think that the chipmaker reported horrendous quarterly earnings by looking at the stock’s reaction today. Not the case. AMBA’s earnings per share and revenue both came in well above consensus:

Second-quarter EPS was up 138% to 88 cents, far higher than the expected 80 cents. Revenue roared 79% higher to $84.2 million, beating the $81.7 million consensus.

But past performance means nothing compared to future results, and Ambarella’s guidance wasn’t nearly enough for Wall Street. Management guided for Q3 revenue between $90 and $93 million. That’s a midpoint of $91.5 million, slightly below consensus expectations for $92.3 million.

It’s somewhat silly that such a narrow miss on guidance can cause such huge swings in AMBA stock, especially considering the blowout quarter it just wrapped up. Today’s move is even more inane when you consider that the reason for soft guidance is simply the timing of GoPro’s camera releases, which came in Q2 this year instead of the more traditional Q3 release date.

I take issue with the severity of today’s drop, especially given the circumstances. However, that does not mean I’m buying AMBA stock for that reason alone. Markets move on earnings, yes, but more than anything they move on human behavior. And there’s a decent chance Ambarella shares haven’t bottomed just yet.

To understand why, let’s look at the Ambarella stock chart:

ambarella-amba-stock-price-chart

See that little red line? That’s Ambarella’s 200-day moving average, $77.83. See the AMBA stock price (at the time this image was captured)? It’s $76.93, which is below the 200-day moving average. That’s bad. Technicians don’t like to see that, especially in concert with an RSI of 25, which indicates oversold territory.

If AMBA holds below its 200-day moving average, expect further pain to ensue. The next point of resistance should be around the May 11 level, or the low $70s.

Ambarella still has everything going for it that it did yesterday: It’s not just a play on GoPro; AMBA is also a major player in the emerging markets of drones, automotive video, and IP security cameras.

And from a fundamental perspective, where else can you buy a stock for 21 times forward earnings that’s expected to grow EPS by 52% this year and 20% next year?

Opportunities like that are few and far between, so I’m bullish on AMBA stock. But if you’re looking to get the most bang for your buck, wait until shares hit the low $70s before locking in.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/ambarella-amba-stock-earnings/.

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