Investors Missing Full Picture on AMBA

High definition video chip maker Ambarella (AMBA) reported better-than-expected quarterly results late last week as the company tried to separate itself from the fortunes of troubled action-cam maker GoPro (GPRO).

Shares initially fell, then rose, then pulled back to flat. It’s interesting how many investors remain short-sighted about this company, ignoring its pivotal role in emerging technology categories like autonomous vehicles, unmanned aerial drones, and security systems. With this in mind, AMBA’s four-month basing pattern near current levels (around $55 a share) could be a compelling buying opportunity for long-term investors.

Here were the results: Earnings came in at $1.08 a share, 22 cents better than the Wall Street consensus estimate of 86 cents. Revenues jumped 42% year-over-year to $93.2 million vs. the $89.9 million that was expected. Profit margins increased to 65.9% compared with 63.4% last year, above guidance.

Ambarella, which boasts of enabling the next generation of sports cameras, is looking to differentiate itself from companies like GoPro, but its shares have been hit nevertheless.

The company cited success in new markets such as flying cameras and home monitoring as driving the results. But they admitted headwinds in the sports wearables market will likely continue into the current quarter.

As a result, management issued downside guidance for the fiscal fourth quarter, with revenues of between $65 million and $67.5 million vs. the lofty $76.3 million analysts were looking for. It looks like someone leaked the numbers early, as shares dropped hard in the final hour of trading before the close Thursday.

I believe we’re getting close to the point that challenges in sports wearables will be fully priced in.

Shares are down nearly 50% since reporting second-quarter results earlier this year in which it beat on all metrics but issued in-line guidance and cautious commentary. Recent results from GPRO, overly optimistic pricing and lukewarm reception for its HERO4 Session camera, and GPRO inventory channel checks have added further pressure to AMBA’s stock price.

Last week, Deutsche Bank analysts lowered their AMBA price target to $70 on the GPRO issues. That would still return shares to the mid-September level and be worth a 32% gain from here. Pacific Crest analysts are looking for $77 a share. My own model suggests that the company is worth at least $105.

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Looking ahead, AMBA’s management expected fiscal 2017 revenue growth of between 15% and 20% (slightly below the consensus estimate) after a “moderate” revenue decline for the first quarter as GPRO cuts orders to trim inventories. Once that headwind clears, and GPRO is able to stabilize its situation, AMBA should be ready to run higher.

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Decembers Start Slow

Most veteran investors know that December is usually a very good month for equity performance, with the sobriquet “Santa Claus rally” a part of the Wall Street lexicon. However, you may not realize that the first half of the month is typically quite Grinchy, while all the gains tend to be back-end loaded after mid-month.

Bespoke Investment Group researched the data and discovered that, in the past 20 years, the S&P 500 has averaged a decline of 0.3% during the first half of December and a gain of 1.7% during the second half. Even going all the way back to 1928, the analysts found, the S&P 500 has seen an average change of 0% during the first half of December and a gain of 1.4% during the second half. Fascinating.

Traders certainly seem to have gotten a head start on that concept in the early part of last week, through Thursday. If the long-term trend for weak early Decembers holds up, there could be further rockiness to come through the next week.

Best wishes,

Jon Markman

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