Riding GoPro Inc’s (GPRO) coattails, Ambarella Inc. (AMBA) quickly became a dominant player in the HD camera-on-a-chip niche market.
Unfortunately for the company, the relationship was a double-edged sword, and AMBA stock suffered alongside GoPro when guidance and sales went south. As such, investors will be closely watching Ambarella’s first-quarter earnings report on Thursday for signs of growth away from the GoPro market.
Diving into the numbers, Wall Street is projecting significant year-over-year declines in Ambarella’s earnings and revenue. In fact, first-quarter earnings are seen plummeting 61% to 28 cents per share from 71 cents per share last year, while revenue is expected to drop 20% to $57 million.
Despite poor year-over-year fundamentals, sentiment remains largely bullish for AMBA stock. According to EarningsWhipser.com, the first-quarter whisper number for Ambarella comes in at 29 cents per share, a cent better than the consensus.
Additionally, analysts continue to cling to their bullish outlooks on AMBA stock. According to data from Thomson/First Call, seven of the 11 brokerage firms following AMBA rate the shares a “buy” or better. Furthermore, the 12-month consensus price-target of $57 represents a 39% premium to Friday’s close.
On the other hand, short sellers are betting big on another sharp decline in ABMA stock. As of the most recent reporting period, some 10 million shares of AMBA stock were sold short, representing a hefty 34% of the stock’s total float, or shares available for public trading. While there is ample fuel for a short-squeeze situation, Ambarella will have to show growth outside of its GoPro relationship before these bears are shaken loose.
Click to Enlarge On the options front, speculators have sided with the bulls ahead of Ambarella’s quarterly report. Currently, the June put/call open interest ratio for AMBA rests at a reading of 0.55, with calls nearly doubling puts among options set to expire within the next month. What’s more, calls have been added at a break-neck pace in the weekly June 3 series, with the put/call OI ratio plummeting from 1.17 yesterday to 0.56 today. This surge in calls could be options traders betting on an earnings beat, or short sellers looking to protect their positions. Either way, this rise in call OI has bullish implications for AMBA stock.
Overall, weekly June 3 series implieds are pricing in a potential post-earnings move of about 7.6% for AMBA stock. This places the upper bound at $44.48, while the lower bound lies at $38.20 based on Tuesday’s close.
2 Trades for AMBA Stock
Call Spread: Investors have had quite some time to digest the GoPro situation, and most of those concerns are already priced into the stock. As such, any positive guidance or new data on Ambarella’s drone program could go a long way toward unravelling penned-up bearish sentiment. Those traders looking to join the bulls in the brokerage community might want to consider a June $42/$44 bull call spread.
At last check, this spread was offered at 81 cents, or $81 per pair of contracts. Breakeven lies at $42.81, while a maximum profit of $1.19, or $119 per pair of contracts, is possible if AMBA stock closes at or above $44 when June options expire.
Put Sell: For those more cautious traders, a deep-out-of-the-money put may be just the way to bank a little profit while relying on technical support. At last check, the weekly June 3 series $37 put was bid at 25 cents, or $25 per contract.
As long as AMBA trades above $37 through the close of trading this Friday, traders will keep the premium received. If AMBA trades below $37 ahead of expiration, however, traders could be assigned 100 shares of AMBA stock for every put sold at a cost of $37 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
