Once a red hot momentum stock, the glow has finally dulled on shares of Ambarella (AMBA). The company is slated to release its third-quarter earnings report after the close Thursday, but Ambarella’s current issues with projected growth are not likely to be solved with one financial report.
Furthermore, the lingering wealth of bullish investor sentiment that once supported the shares could now become a considerable liability for AMBA stockholders. That said, this situation for Ambarella stock could be a potential boon for savvy options traders
Diving into the heart of the issue, Ambarella’s problems are not with its products, but rather it’s limited customer pool. Currently, GoPro (GPRO) is the company’s biggest customer, and where GoPro goes, so goes Ambarella.
This arrangement worked well for AMBA stock when GoPro cameras were selling like hotcakes, but GoPro sales have begun to fall short of expectations.
All is not lost for AMBA stock, however, with Stifel noting that Ambarella’s sales could improve 20% to 25% annually if the company can decouple from GoPro and expand its IP security and automobile markets. Still, such a decoupling will take time, and will likely only show up in Thursday’s quarterly report in forward looking statements, if it shows up at all.
This leads us to the immediate outlook for AMBA stock. Despite GoPro concerns and weak AMBA stock price action, expectations are running high on Wall Street for Ambarella earnings. Currently, the analyst community is looking for earnings of 86 cents per share, up 26.5% year-over-year, on revenue of $89.9 million, up roughly 40% year-over-year. What’s more, the whisper number arrives even higher at 89 cents per share.
Ratings and price targets are also considerably elevated. According to Thomson First Call, AMBA stock has acquired seven “buys,” six “holds” an no “sell” ratings. Additionally, the 12-month consensus price target of $90 represents a hefty 50% premium to AMBA’s current trading range.
While analyst optimism is typically seen as a bullish indicator, for AMBA and its issues with growth, this backdrop puts the shares at risk for downgrades and price target cuts. In fact, some analysts are already realigning their position on Ambarella stock. Specifically, Deutsche Bank cut its price target to $70 from $85 per share yesterday.
Click to Enlarge Options traders, meanwhile, are somewhat reserved when it comes to Ambarella’s earnings. At last check, the weekly Dec. 4 series put/call open interest ratio for AMBA stock came in at 0.89, with puts nearing parity with calls heading into the report.
Overall, weekly Dec. 4 series implieds are pricing in a potential post-earnings move of more than 12% for AMBA stock. This places the upper bound at $66.84, while the lower bound lies at $52.16.
2 Trades for AMBA Stock
Put Spread: Those traders concerned that the situation for AMBA will get worse before it gets better may want to consider a Dec $55/$57.50 bear put spread. At last check, this spread was offered at $1.05, or $105 per pair of contracts. Breakeven lies at $56.45, while a maximum profit of $1.45, or $145 per pair of contracts, is possible if AMBA closes at or below $55 when December options expire.
Call Spread: On the other hand, those traders looking to side with analysts might want to consider a Dec $60/$65 bull call spread. At last check, this spread was offered at $2.04, or $204 per pair of contracts. Breakeven lies at $62.04, while a maximum profit of $2.96 is possible if AMBA closes at or above $65 when December options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
