Ambarella Inc (AMBA), the high-definition video chip-maker best known as the supplier behind wearable action cam-maker GoPro (GPRO), has been on a wild ride on Wall Street this year.
Starting the year around $50 per share, the stock rallied into the summer as it gained institutional attention and folks like Jim Cramer started hailing it as the greatest thing since sliced bread.
It reached a peak above $122/share before a bearish piece by Citron Research — the same firm behind Valeant‘s (VRX) recent bad press and subsequent plunge — sent AMBA stock south.
For the last three months — up until several weeks ago — AMBA and GPRO traded in virtual lockstep. While the two stocks have started to diverge, I believe Ambarella’s third-quarter earnings, which are expected after the bell on Thursday, will further show the markets that AMBA isn’t merely a GoPro proxy.
Here’s why:
Consensus Views
First, here’s a by-the-numbers look at what analysts expect from AMBA stock Q3. Analysts expect earnings per share of 86 cents in the October quarter, growth of 26% from the 68 cents per share it earned a year ago.
Revenue is also expected to jump, advancing 37% from $65.7 million to $89.9 million in the third quarter.
Yet, with this kind of growth expected from AMBA, Ambarella stock still trades at less than 18 times forward earnings — the same multiple as the far slower-growing S&P 500 index. This is a failure in valuation, but one that individual investors can and should exploit if they have the means and the risk tolerance.
Kevin Cassidy of Stifel lays out a brief but compelling case for why AMBA stock is currently a strong buy:
“While Ambarella management’s 3QFY16 guidance included a y/y and q/q decline in Sports Camera/GoPro sales, total revenue was guided to 40% y/y growth. In our view, IP Security, Automotive, Drone and Wearable Camera markets have continued to grow in-line with our expectations.”
It doesn’t matter that GPRO hasn’t been selling well. Ambarella’s management expected that. But because the company is diversified across so many other high-growth end markets, it has insulated itself.
The drone market in and of itself is an exciting opportunity for AMBA stock longer-term, especially if Amazon (AMZN) successfully lobbies the FAA to allow it to make drone deliveries. Amazon claims the technology is ready to go, and just released an entertaining ad showcasing the technology in use.
Bottom Line
At the end of the day, I don’t have a crystal ball, and Thursday’s earnings may miss or beat.
But as someone who has been watching AMBA stock for years, and as a current shareholder myself, I’m a firm believer that shares are dramatically undervalued at today’s levels … and that I’d like to own Ambarella stock before Wall Street figures that out.
As of this writing, John Divine was long AMBA stock and AMZN stock. You can follow him on Twitter at@divinebizkid or email him at editor@investorplace.com.
