Betting on an Ambrella (AMBA) Recovery? Exercise Caution

Ever since Ambarella Inc (NASDAQ:AMBA) sank after it reported second-quarter results on August 31, the stock is showing some resilience. Analyst upgrades and a brighter outlook for GoPro Inc (NASDAQ:GPRO) are giving shareholders more optimism, but there are still risks that Ambarella’s stock rebound will reverse because GoPro’s new product release is far from a guaranteed success. On top of that, Ambarella itself could report a weak third quarter that undermines analyst optimism.

AMBA Q3 Guidance

Ambarella guided revenue in the range of $87.5-$90.5 million for the third quarter. This is within the approximately $89 million average analyst estimate. Gross margin (non-GAAP) is forecasted to fall to as low as 62%, down from 63% in Q2, while expenses will be in the range of $28-$29.5 million. Ambarella is clearly facing margin compression, and its drone customer, DJI, is struggling too. Drone prices are falling due to falling consumer interest. Ambarella will very likely face headwinds for at least the next few quarters. Currently priced below $50, AMBA stock is trading at appropriate levels because it reflects the challenges ahead. At a forward P/E of 29x, value investors will view AMBA stock as overvalued.

GoPro's Karma does not use Ambarella (AMBA)
Source: GoPro


Computer Vision Chip

Typical of any technology company, Ambarella is not sitting still as the demand for drones weakens. The company is developing a computer vision chip that will shape the way cars auto-drive. Ambarella’s CV chip will “put the video processing at the forefront,” in effect merging computer vision algorithms with video and image processing.

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ADAS, or autonomous driving, is today’s catch phrase that many tech companies are pivoting toward. Nvidia Corporation (NASDAQ:NVDA) has a self-driving vehicle development platform called Drive PX. Intel Corporation (NASDAQ:INTC) acquired Mobileye so that its computing business could get in on the action of ADAS development.

But for now, the short-term headwinds for AMBA stock cannot be ignored. Revenue is expected to fall by over 10% in the next quarter, year-over-year. The CV chip will reignite Ambarella’s business, but in the near term, it will need to turn its business around in small steps.

AMBA Stock Gets Upgrade

Unlike on September 1, when Ambarella received downgrades from Roth Capital, Craig-Hallum, and Dougherty & Company, Morgan Stanley wrote on September 27 that AMBA stock could be worth as much as $115 a share. The analysts reasoned that the computer vision chips are a PLD (programmable logic device) that would compete effectively with Intel’s Mobileye. Without this upside, the stock is still worth $60 a share, which is still more than $10 above its recent price. Investors buying this stock are buying in to the speculation that there is a market for the CV chip and that Ambarella will win a large part of the total addressable market. This is a big unknown.

GoPro Not a Factor in AMBA’s Future Prospects

Markets may have coupled GoPro’s stock rally with that of Ambarella’s stock. Yet the newest Hero 6 does not use Ambarella’s camera. It uses “GP1,” which GoPro exclusively sourced from a low-to-mid range supplier, Socionext. This mispairing could hurt Ambarella’s share price as markets realize GoPro’s success will not give Ambarella a meaningful lift.

Takeaway for Ambarella Stock Investors

Ambarella is not a compelling value investment at this time, but that will not stop speculators from bidding the share price higher. A market correction or another weak quarter will erase the rally in AMBA stock that began in September. Exercise caution if buying Ambarella as an investment.

Article printed from InvestorPlace Media,

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