Semiconductor specialist Ambarella Inc (NASDAQ:AMBA) needs a new market, and quick. The company rose to fame and glory on Wall Street by providing key high-definition video capture chips to GoPro Inc. (NASDAQ:GPRO). As GoPro went, so, too did AMBA stock.
But GoPro fell on hard times following a series of botched product launches and increased competition — especially from Chinese knockoff competitors. Furthermore, practically every smartphone on the market now had the same capabilities provided by Ambarella HD video chips, rendering GoPro and Ambarella’s technological lead in the market moot.
Last month’s poor earnings guidance reflected this downward spiral. Ambarella warned that investors should expect “a substantial decline” in its GoPro business and said it saw weaker-than-expected business in the high-end drone and virtual reality markets.
Then, in mid-September, GoPro dropped a potential bomb that could exacerbate the situation: GoPro was sourcing internal for the HD video chips in its new HERO6 action camera. Ambarella, it seems, is slowing losing its grip on its key customer — and that’s not good for AMBA investors.
Click to Enlarge This weakness is already showing up in AMBA stock’s technical backdrop. September’s plunge following earnings was compounded by AMBA stock’s inability to overtake resistance at its 200-day moving average.
Furthermore, the shares are now staring up at resistance from their 50-day trendline in the $50 region. This dual-layers overhead resistance will be extremely hard to overcome, especially given Ambarella’s earnings warning and dwindling revenue from GoPro.
Despite these troubles, sentiment remains broadly positive on AMBA stock. For instance, Thomson/First Call reports that seven of the 12 analysts following AMBA rate the shares a “buy” or better. Additionally, the 12-month consensus price-target of $53.22 represents a nearly 9% premium to Friday’s close. This leaves AMBA vulnerable to downgrades due to valuation.
Options traders are also heavily bullish on AMBA stock. Currently, the October put/call open interest ratio arrives at an extremely bullish reading of 0.16, with calls more than quintupling puts among front-month options.
Overall, October implieds are pricing in a potential move of about 6.8% for AMBA stock. This places the upper bound at $52.32, while the lower bound lies at $45.68.
2 Trades for AMBA Stock
Put Spread: Traders looking to take advantage of a renewed downtrend for AMBA stock might want to consider an Oct $45/$47.50 bear put spread. At last check, this spread was offered at 48 cents, or $48 per pair of contracts. Breakeven lies at $47.02, while a maximum profit of $2.02, or $202 per pair of contracts — a potential 320% return — is possible if AMBA stock closes at or below $45 when October options expire.
Put Sell: For those looking for a more neutral to bearish play, an Oct $45 put sell might be a way to capitalize on technical support. At last check, this put was bid at 37 cents, or $37 per contract. The upside to this put sell strategy is that you keep the premium as long as AMBA stock closes above $45 when Oct options expire. The downside is that should AMBA trade below $45 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $45 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.