Why Shares Of Ambarella (AMBA) Declined Over 13% Last Week?

Shares of Ambarella Inc. (NASDAQ:AMBA) witnessed a sharp decline last week, mostly after it reported first-quarter fiscal 2018 results. To some investors, choosing the stock may appear to be a no-brainer because right after an earnings release, a company is almost always on investors’ radar. While better-than-expected results make the stock a good pick, lower-than-expected results dampen investors’ spirit. So, the period following earnings releases is often marked by high market activity.

Shares Plunging

Ambarella reported its quarterly numbers on Jun 6 after the market closed, following which its shares have lost approximately 13.4% of its value so far. Notably, while the overall Zacks categorized Electronics – Semiconductors industry has performed well this year so far, Ambarella, on the other hand, has disappointed investors. The stock lost 4.4% in the year-to-date period, while the industry recorded growth of 24.5% in the said period.

Although the recently reported quarterly results for the fiscal first quarter came well ahead of expectations, the company’s guidance for the forthcoming quarter has disappointed investors. The soft guidance provided by the company may be due to the number of challenges it has been facing.

The most important of them is that it may lose its largest customer – GoPro (NASDAQ:GPRO) – which recently announced that its soon-to-be-launched Hero 6 action camera will not be based on Ambarella’s system-on-a-chips (SOCs). Rather, the company will use application-specific integrated circuit (AISC). Loss of its largest customer will have a severe impact on Ambarella’s top and bottom lines, in our opinion.

Secondly, although the company has recorded tremendous growth in IP security, auto and non-GoPro wearable markets; the drone market failed to stand up to expectations in the fiscal first quarter. Also, Ambarella, during its latest quarterly conference call, declared 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.”

Thirdly, in our opinion, Ambarella is about to face a new challenge due to QUALCOMM Inc. (NASDAQ:QCOM) .It should be noted that Qualcomm is also looking to expand its product portfolio, in order to cope up with the company’s declining share in the mobile chipset market. It will be acquiring NXP Semiconductors, which is the world’s biggest automotive chipmaker. The acquisition is likely to help Qualcomm in expanding its foothold in new markets such as wearables, automotive, drones and other Internet of Things devices. The entry of Qualcomm is a real threat as Ambarella may find it difficult to win new deals and might as well lose some of its customers.

Downward Estimate Revisions

Over the last seven days, the Zacks Consensus Estimate for second-quarter and fiscal 2018 witnessed downward revisions. For the fiscal second quarter, the Zacks Consensus Estimate is currently pegged at 10 cents, which is lower than the earnings of 12 cents projected seven days ago. Similarly, the Zacks Consensus Estimate for fiscal 2018 is currently pegged at 69 cents compared with 80 cents projected seven days ago.

Bottom Line

We remain cautious about the company’s near-term prospects due to the aforementioned challenges which are currently being faced by the company. Also, macroeconomic challenges and tepid IT spending remain other near-term concerns.

Nonetheless, we are encouraged by the company’s efforts toward expanding its reach in other markets, such as IP security, automotive, non-GoPro wearable and drones/flying cameras and simultaneously lower dependency on GoPro. Notably, although performances of drones/flying camera segment were somewhat disappointing in the last quarter, the company witnessed robust growth at IP security, non-GoPro wearable and automotive segments. We believe that its consistent focus on the above discussed segments will benefit it over the long run.

Currently, Ambarella carries a Zacks Rank #3 (Hold).

A better-ranked stock in the Electronics – Semiconductors space is Applied Optoelectronics, Inc. (NASDAQ:AAOI) , which sports a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Optoelectronics witnessed upward estimate revision for the second quarter and full-year 2017, over the last 60 days. Moreover, the stock has an expected long-term EPS growth rate of 20%.

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