Ambarella Stock Has a Lot to Prove on Tuesday

Shares of the HD video-chip solutions provider will be volatile after quarterly results come out on Tuesday afternoon.

Rick Munarriz
Rick Munarriz
Jun 5, 2017 at 9:06AM
Technology and Telecom

Things are starting to look up for Ambarella (NASDAQ:AMBA) shareholders. The stock is climbing for its third month in a row, but we're far removed from where it was at its peak. The provider of video compression and image processing semiconductors has seen its shares shaved by more than half since hitting all-time highs two summers ago.

We'll find out soon if the recent buoyancy in the stock was warranted, as Ambarella reports quarterly results after Tuesday's market close. The shares tend to be volatile on earnings news. They opened 2.7% higher the day after the company posted better-than-expected quarterly results last time out, only to close out the day 4.4% lower. Things also didn't go well the time before that, as shares took an 11.3% hit the day after Ambarella posted its fiscal third-quarter results. 

Ambarella stock fell 6.7% the quarter before that. You have to go back a year -- when the shares soared 9.4% after last year's fiscal first-quarter financials came out -- to find the last time the stock moved higher the day after reporting results. Investors are hoping that Tuesday afternoon will bring an end to the unfortunate streak of three significant declines after quarterly announcements.

An a7L chip from Ambarella.

Image source: Ambarella.  

Chipping in 

Analysts aren't holding out for much when it comes to growth. They see revenue climbing 11% to $63.5 million, but that's less than $71 million that it delivered during the same period two years earlier, when it was riding the coattails of GoPro's (NASDAQ:GPRO) success as the lone provider of video chips for the wearable-camera leader. The market's bracing for similar growth on the bottom line, with earnings per share climbing to $0.36 from $0.34 a year earlier.

Investors may take comfort in knowing that history suggests that Ambarella will earn quite a bit more than $0.36 a share. The video-chip specialist has routinely landed ahead of where analysts are parked, and it hasn't even been close.

Quarter EPS Estimate EPS Actual Surprise
Q1 2017 $0.28 $0.34 21%
Q2 2017 $0.38 $0.54 42%
Q3 2017 $0.94 $1.11 18%
Q4 2017 $0.74 $0.92 24%

Data source: Yahoo! Finance.

The sobering news -- for those already connecting the stock's price moves the past three quarters with its target-busting prowess -- is that the stock still took a hit despite beating Wall Street income estimates by 42%, 18%, and 24% during the last three reports. The key here will be if Ambarella is able to offer a rosier outlook as it tries to decouple from GoPro. It's already a notable player in dashboard cameras, drones, surveillance gear, and virtual-reality equipment.

Wall Street pros were divided in analyst notes last week. Brad Erickson at Pacific Crest downgraded the stock on Tuesday from "overweight" to "sector weight," arguing that its largest drone customer, DJI, may be sourcing some of its video chips elsewhere. A call to DJI customer service about its new entry-level $499 Spark drone leads Erickson to believe that Ambarella is not the drone's video processing provider. 

Kevin Cassidy at Stifel came to Ambarella's defense two days later, arguing that the stock should be bought on weakness. He thinks Pacific Crest's drone concerns are overblown, and that this week's quarterly results should be solid. 

The battle lines have been drawn, and we'll see which way the stock moves after Tuesday afternoon's report.