Ambarella Inc (NASDAQ:AMBA) stock has a lot to prove when the company reports its first quarter earnings on Tuesday. AMBA stock soared after Intel Corporation (NASDAQ:INTC) announced it was buying Mobileye NV (NYSE:MBLY) for $15.3 billion, giving credence to the notion that AMBA’s autonomous driving opportunity may be more valuable than originally thought.
But the stock’s nearly 20% off its April lows also makes the shares look particularly risky heading into earnings.
The question is: Is the long-term growth story enough to surpass those fears?
Ambarella Earnings Are Risky
Ambarella simply does not beat Street estimates, posting a perfect record against the analysts over the past four years.
But that still doesn’t make AMBA stock a sure-fire bet headed into earnings. In fact, it actually piles more risk on top of the stock.
Ambarella has now built an expectation that it will top every quarterly mark. As such, AMBA tends to trade up or down less based on the quarterly numbers, and more based on the guidance. That means huge downside risk in the unlikely event Ambarella does miss, as well as being at the mercy of typically conservative management providing acceptable guidance.
Recently, Ambarella’s outlook hasn’t been so good, pushing AMBA shares lower following its reports. In fact, it’s been about a year since the stock traded higher the day following earnings.
Because of this dynamic, I am not terribly interested in playing AMBA into earnings. There’s too much unpredictable risk on the table.
But … Ambarella Has an Outstanding Growth Story
In 2015, Ambarella skyrocketed to fame as the chip supplier for GoPro Inc (NASDAQ:GPRO). But as GoPro lost its popularity, so too did AMBA stock, which fell sharply from nearly $120 in July 2015 to below $40 by January 2016.
Ever since then, AMBA has aggressively tried to diversify its revenue streams in an attempt to decrease reliance on GoPro. Fiscal 2018 may finally be the year when that diversification comes full circle. Rumors are circulating that GoPro and Ambarella may be going through a divorce. GoPro’s next major product, the Hero6, may not use an Ambarella chip at all.
That is a near-term headwind, but a long-term tailwind. AMBA is exposed to multiple secular growth markets. Removing GoPro from the equation allows Ambarella to focus on these other high-growth segments.
In a broad sense, high-definition and ultra high-definition video capture is rapidly being integrated into many new, hyper-growth markets. Home monitoring is a huge one, with large players such as Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOG) all making pushes into the smart home market. The drone market is also fairly large and growing at a rapid rate.
Perhaps the biggest growth market of them all is the autonomous driving space, where AMBA’s computer vision chip has a particularly useful application.
AMBA is exposed to all of these high-growth markets.
While competition is intense, Ambarella has made a name for itself as the best and most trusted chip supplier on the market. Because of this, I have full confidence that Ambarella will continue to grow as these markets expand.
Bottom Line on AMBA Stock
I don’t look at Ambarella as an earnings play, but rather a “buy the dip” type of stock. Shares have dipped somewhat on DJI drone and Nest camera concerns (rumors that new products may not be built on Ambarella chips), but the stock is in a longer-term uptrend off the $50 level.
As such, despite the secular market tailwinds, I am not rushing to buy Ambarella stock here. I think the stock has a pure 50/50 chance of going up or down on earnings. I think the rally should be faded, and the dip should be bought.
Personally, I am hoping Ambarella management gives a poor guide and that sends shares spiraling. That will give me an opportunity to buy into AMBA stock at an attractive price.
As of this writing, Luke Lango was long AMZN.