Ambarella (AMBA) To Report Q2 Earnings: A Miss In Store?

Ambarella, Inc. (NASDAQ:AMBA) is set to report second-quarter fiscal 2018 results on Aug 31. Last quarter, the company posted a positive earnings surprise of 8.3%. Notably, the stock has outperformed the Zacks Consensus Estimate in the preceding four quarters, generating an average positive earnings surprise of 23.8%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Ambarella manufactures video compression and image processing technology that is used in a variety of small cameras, computers and mobile phones. The company has a diversified product line, offering devices that fit into five main markets — Security Cameras, Automotive Cameras, Sports & Flying Cameras, Wearable Cameras, and Broadcast Infrastructure Systems.

Of these categories, Ambarella is most noted for its sports camera technology. The company produces a video processing chip, which is a main component in the popular brand of the GoPro (NASDAQ:GPRO) action cameras.

However, Ambarella, during its last quarterly results, warned about a possible decline in revenues from GoPro in fiscal 2018. This is because per the company, GoPro is using a chip from a competitor in its new camera, which will mar Ambarella’s shipment volumes, resulting in revenue decline in the to-be-reported quarter. Moreover, escalating operating expenses are expected to thwart bottom-line growth.

Apart from this, although the company recorded tremendous growth in IP security, auto and non-GoPro wearable markets, the drone market failed to stand up to expectations in first-quarter fiscal 2018. Also, Ambarella, during its last quarterly conference call, announced that it no longer foresees growth in the drone market this fiscal due to “continued weakness from Tier 2 drone customers as well as a difficult year-over-year comparable due to timing of product launches.”

Nonetheless, we are encouraged by the company’s efforts toward diversifying its business, as well as lowering dependency on GoPro, which is likely to benefit it over the long run. However, we do not expect any material impact of these initiatives on the fiscal second-quarter results.

Earnings Whispers

Our proven model does not conclusively show that Ambarella will likely beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at -3.64%. This is because the Most Accurate estimate of 43 cents comes in lower than the Zacks Consensus Estimate of 45 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Ambarella carries a Zacks Rank #3. Though this increases the predictive power of ESP, the company’s negative ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are a couple of stock you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

G-III Apparel Group, LTD. (NASDAQ:GIII) , expected to release earnings on Aug 29, currently has an Earnings ESP of +4.76% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Palo Alto Networks, Inc. (NYSE:PANW) , scheduled to release earnings on Aug 31, currently has an Earnings ESP of +0.07% and a Zacks Rank #3.

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