Ambarella Inc (AMBA), a supplier of high-definition video chips, stumbled then recovered in early trading Friday, after posting blowout earnings and revenue in the third quarter.
AMBA has been on an absolute roller coaster this year, beginning the year around $50 and soaring as high as $129. With shares below $58 at yesterday’s close, AMBA has been selling off steeply since this summer.
GoPro Inc (GPRO), once the biggest catalyst for Ambarella as well as its largest and most well-known single customer, is now the biggest thorn in AMBA’s side.
And it was weakness from GPRO that briefly sent shares plunging in after-hours and early morning trading.
AMBA Earnings by the Numbers
As you might expect, that initial slump wasn’t because investors were angry over AMBA’s blowout Q3, but were instead upset about fourth-quarter guidance dragged down by an underperforming GPRO. Let’s take a look at both the good and the bad in Ambarella’s earnings.
The Good: In the quarter ended Oct. 31, AMBA easily cruised passed Wall Street estimates, posting earnings of $1.08 per share, up 59% from last year and well ahead of the 86 cents analysts were looking for. Revenue, too, was impressive, rising 42% year-over-year to $93.2 million, easily higher than the $90 million analysts expected.
The Bad: For the current quarter, Ambarella expects revenue between $65 million and $67.5 million, implying revenue growth of just 2.7% at the midpoint. Consensus estimates were calling for $76.3 million. This is a HUGE miss, and the only reason we’re not seeing AMBA stock ripping off legendary gains today.
While shares were down as much as 9% in aftermarket trading yesterday following the results, AMBA quickly rallied in the first 10 minutes of trading to breakeven, then to solid gains. This could be due to “short covering,” where those betting against the stock locked in their gains on the trade by buying Ambarella shares. The stock’s days-to-cover ratio was 5.6 through mid-November, indicating significant short interest.
Whatever the reason for the stock’s wavering, it’s clear that GoPro is becoming more of a liability than anything for AMBA. The wearable action camera company hit all-time lows Friday after Ambarella’s earnings call; despite solid growth in areas like IP security cameras and car dashboard cameras, the projected slump in AMBA’s wearable revenue seems severe.
Bottom Line on AMBA and GPRO
I can’t say what will happen to Ambarella over the coming months, especially if GoPro sales turn out to be as awful as they’re expected to be. But longer-term, I still think AMBA is a steal.
While a big part of Ambarella’s story, GPRO will become less relevant over time as other industries like home security, automotive and drones occupy a larger piece of the pie.
That said, if GoPro’s problems become truly irreversible, perhaps there will come a time to reconsider. I doubt that will happen however, since even GPRO is diversifying its business and getting into drones, which should be a net positive for AMBA.
I wrote earlier this week that I think this stock is a steal, and I still believe that. We just saw earnings soar nearly 60%, yet shares trade for 25 times earnings.
This is a growth stock with great value, and I’ll be holding my own shares well into next year, at least. I recently bought shares around their current levels, and if the stock starts trading sub-$50, I’ll be picking up some more.
As of this writing, John Divine was long AMBA stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
