It’s earnings time again for Ambarella Inc (NASDAQ:AMBA), and a 66% rally in AMBA stock since the company’s last resort has shares looking a bit top-heavy. Ambarella’s results are often heavily affected by GoPro Inc (NASDAQ:GPRO), however, and given GoPro’s solid performance earlier this month, it could mean more upside for Ambarella.
By the numbers, the consensus is anticipating a profit of 38 cents per share of AMBA stock. That figure would be down sharply from earnings of 86 cents in the year-ago quarter. Revenues are expected to fall 24% to $64 million.
You can blame the plummeting revenue and earnings figures on the near implosion of the wearable camera market — a trend that has undermined GoPro’s earnings for the past year. However, GPRO has unveiled two products — the Hero5 and the Omni VR drone — expected to boost holiday sales figures. Ambarella chips are in both products, so expect guidance to mirror GoPro’s better-than-expected forecasts.
In fact, some analysts are hedging their bets on Ambarella’s quarterly report. According to EarningsWhipsers.com, the second-quarter whisper number arrives at 41 cents per share, 3 cents better than the consensus.
This bullish sentiment has spilled over into the rest of the brokerage community. According to Zacks data, six of the 10 analysts following AMBA stock rate it a “buy” or better, with no “sell” ratings to be found. That could improve, however; the 12-month consensus price target of $61.75 represents a 14.2% discount to Monday’s close.
But while analysts are leaning bullish on AMBA stock, the rest of Ambarella’s sentiment backdrop is steeped in negativity.
For instance, as of the most recent reporting period, the bears had sold some 6.9 million AMBA shares short, representing 22% of the stock’s total float. But a shift is underway, as Ambarella short interest fell 6% during the period. A continuation of this trend could provide additional price support.
Click to EnlargeOptions traders are heavily bearish. The September put/call open interest ratio currently is at a lofty 1.49. Furthermore, this ratio rises sharply to 2.09 for the weekly Sept. 2 series, as puts more than double calls among options most affected by Thursday’s quarterly report.
Overall, weekly Sept. 2 series implieds are pricing in a potential post-earnings move of about 6.9% for AMBA stock. This places the upper bound at $75.36, while the lower bound lies at $65.64.
With all that in mind, we have two trades in mind.
2 Trades for AMBA Stock
Call Spreads: Ambarella has powered higher recently despite growing interest-rate hike concerns on Wall Street, and that speaks volumes for shares’ price support. GoPro’s results have clearly been factored in already, and yet expectations remain low for both guidance and the current quarter. As a result, any positive news from Ambarella this Thursday could have an uplifting effect on AMBA stock. Not only would Wall Street buy, but we could see short covering and price-target hikes from the analyst community.
Traders looking to bet on an extended rally for AMBA stock might want to consider a Sep $72/$75 bull call spread. At last check, this spread was offered at $1, or $100 per pair of contracts. Breakeven lies at $73, while a maximum profit of $2, or $200 per pair of contracts, is possible if AMBA stock closes at or above $75 when September options expire.
Selling Puts: For those more cautious traders, a deep out-of-the-money put is a way to rely on technical support to bank some profits. At last check, the weekly Sept. 2 series $65 put was bid at 70 cents, or $70 per contract.
As long as AMBA stock trades above $65 through Friday’s close, traders will keep the premium received. If Ambarella trades below $65 ahead of expiration, traders could be assigned 100 shares of AMBA stock for every put sold at a cost of $65 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
