Is Now the Time to Buy Ambarella, Inc. Stock?

Image source: Ambarella.

Shares of video processing chip specialist Ambarella (AMBA 3.18%) have fallen more than 15% so far in October as of this writing -- and despite being the recipient of an encouraging analyst note last week. With a little more than a month until Ambarella's fiscal third-quarter 2017 report, that raises the question: Is now the time to buy Ambarella stock?

For a number of reasons, I think so.

Perspective is in order

First, while I don't typically pay close attention to Wall Street's short-term demands, I found the context of one of last week's notes compelling. 

In particular, Canaccord Genuity maintained its "buy" rating on Ambarella, and simultaneously increased its price target on shares -- albeit ever so slightly -- from $86 to $87 -- a roughly 39% premium to Ambarella's closing price on Monday. But most telling was that Canaccord did so with a balanced approach shortly after meetings with Ambarella management.

Canaccord first admitted meetings regarding near-term trends were "mixed in tone" as investors seek "to understand the size and growth potential of the sports camera and drone markets." And that's fair enough considering weakness in the wearable camera market served as the primary antagonist holding back Ambarella from achieving year-over-year revenue and earnings growth in each of its past several quarters.

But as Canaccord also elaborated:

Longer-term focused meetings were quite positive and we believe investors are gradually starting to understand the underappreciated sensor fusion algorithm and computer vision hardware roadmaps. [...] Overall, despite the recent headwinds to growth at GoPro (GPRO -1.12%) and from Sony (NYSE: SNE), our long-term conviction regarding Ambarella's leading technology position in several growing end markets including wearable, security, automotive, and drone cameras remains intact.

Surprise!?

To be fair, this isn't entirely surprising. During their most recent earnings conference call last month, Ambarella management has already confirmed the company expects to return to growth in the current quarter thanks to a combination of a rebound in wearables, the impending resolution of supply shortages from Sony's temporary factory shutdown following an earthquake in Japan, and "strong design momentum" across the aforementioned industries.

What's more, I argued only a few weeks ago that drones and automotive have already proven themselves to be Ambarella's best segments so far in 2016, thanks both to their future potential and contributions propping up the company's overall results as demand for wearable cameras waned.

Buckle up and enjoy the ride

But that's also not to say there won't be bumps in Ambarella's road from here.

Part of Ambarella's recent decline, for example, can be chalked up to worries over whether GoPro's HERO 5 cameras -- in which Ambarella's chips serve a central role -- will indeed positively contribute to Ambarella's return to growth in the crucial holiday period. Those worries were exacerbated last week after GoPro opted to temporarily stop shipping its newly launched HERO5 cameras to Amazon.com reportedly due to a pricing conflict.

Nonetheless, the same reports estimated only 12% to 14% of GoPro's revenue was tied to units shipped to Amazon. And keeping in mind wearable cameras' slice of Ambarella's total revenue fell to the low-single-digit percent range earlier this year, which in turn caused them to take a more cautious approach to gauging the wearables industry over the short term, any year-over-year rebound in the wearables segment should be icing on the cake for Ambarella in the next few quarters.

In addition, Ambarella continuously faces a wall of worry from investors over the state of competition in its niche, namely as management has acknowledged that chip giant Qualcomm (NASDAQ: QCOM) has been trying to woo Ambarella's drone and wearables customers to their own competitive solutions. Here again, however, management has repeatedly argued their aggressive R&D efforts and cost-effective, multi-purpose system-on-chip platforms still offer significant competitive advantages in video quality, comprehensive features, power consumption, and total solutions cost. 

Based on the specifics listed on competition in Canaccord's note last week, it's evident they're still reiterating that argument on the record now. With only a few weeks left until Ambarella's fiscal third-quarter 2017 report hits the wires, I think that's a great sign that Ambarella remains on track to reclaim its former highs.