The bears have been in control of video chip upstart Ambarella Inc (AMBA) in recent months. But as we say goodbye to 2015, a technical grounding is looking ready for liftoff, and AMBA stock represents a good buy for investors entering into the new year.
2015 has been a heck of year filled with both technical cheers and jeers for Ambarella stock. AMBA began the year by shooting skyward to gains of more than 150% on overly optimistic growth prospects largely tethered to Ambarella’s largest customer, sport camera upstart GoPro (GPRO).
Following the substantial price run in AMBA stock, a monthlong corrective move of about 25% was followed by a run to fresh but narrow all-time-highs of $129.19 in late July.
Then, the rug was yanked.
Growth concerns at GoPro and Ambarella’s own profit miss and revenue warning pressured AMBA shares following its meteoric rise. Potential chip competition from Qualcomm (QCOM), a weaker overall market and well-positioned, heavy short interest raising doubts of Ambarella’s longevity all also conspired in establishing a decline of about 62% in AMBA stock during the second half of 2015.
Why AMBA Stock Will Lift Off
Ambarella has plenty of cash in the bank, no debt and continues to distinguish itself as more than just a GoPro supplier as it makes inroads into momentum markets like body cams and autonomous, self-driving autos.
Most recently, AMBA stock received a “buy” initiation and price target of $80 from investment shop Craig-Hallum Capital Group. The firm noted that Ambarella’s dominate position and expertise in the high-end video capture market as key to growth and support for AMBA stock.
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Looking at the technical landscape and entering 2016, AMBA stock is shaping up for higher prices after its substantial collapse during 2015’s second half.
The fact is, stocks are prone to corrections. Growth stocks like Ambarella are particularly prone to hard selloffs as they fall out of favor. But if the story remains compelling, buying on weakness makes a good deal more sense.
Given Ambarella stock’s stiff 62% retreat and couple months of loose, lateral consolidation work that’s successfully tested its lifetime 62% Fibonacci support, a playable bottom looks to be in play.
Lastly, the current consolidation in AMBA stock has established a couple higher highs and higher lows. The price action suggests an uptrend is slowly developing and confirms a low.
AMBA Stock Bull Call Spread Strategy
For traders interested in positioning for a liftoff in 2016 for AMBA stock, the Feb $60/$67.50 bull call spread for $2.50 or less is attractive.
A vertical spread in AMBA stock offers traders a limited-risk position in a notoriously volatile name, while greatly reducing time decay and implied volatility risks associated with an outright long call.
The position of this vertical is currently out-of-the-money and will require AMBA stock to move to $62.50 to break even at expiration. However, faster bullish price moves can yield interim profits at lower levels.
Should AMBA stock’s uptrend develop further, the opportunity for profits of $5 — a return of 200% — in less than two months of holding time above $67.50 is possible. And as that objective is less than 4% above recent highs, that’s something other than a flight of fancy.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
