Please ensure Javascript is enabled for purposes of website accessibility

Why Ambarella Stock Dropped 13.5% This Morning

By Rich Smith - Oct 8, 2019 at 11:25AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

New tariffs on China could affect 15% of the semiconductor company's business.

What happened

Shares of HD video system-on-a-chip maker Ambarella (AMBA 6.41%) are getting rocked this morning, down 13.5% in early trading, and rebounding to about a 10.4% loss as of 12:15 p.m. EDT.

The reason: Donald J. Trump.

In what feels like a continuation of the president's long-running trade war against China in general, and Chinese tech stocks in particular, the U.S. Department of Commerce has announced it is adding 28 Chinese security technology companies to its Entity List of sanctioned companies.

Two fists, emblazoned with Chinese and American flags, meet.

Image source: Getty Images.

So what

What does this have to do with Ambarella? American companies that wish to sell components to Chinese counterparts on the Entity List must seek specific U.S. government approval to do so. And the problem for Ambarella is that two of the companies on the list -- surveillance camera and video recording equipment makers Hikvision and Dahua -- are major customers of Ambarella products.

Already, analysts have responded to the news. KeyBanc cut earnings estimates for Ambarella, according to a note just out on TheFly.com. And Stifel Nicolaus cut its price target on the stock (to $54), citing the company's exposure -- 15% of revenue -- to the two named Chinese customers.

Now what

Things might not be quite as bad as they seem. A third analyst, Morgan Stanley, points out that just having its customers put on the Entity List doesn't absolutely forbid Ambarella from selling to them -- it just makes those sales harder, because Ambarella has to seek government approval for each contract.

Additionally, if addition to the Entity List crimps international sales of HIKVision and Dahua cameras, other Ambarella customers -- from outside China or at least not included on the Entity List -- may gain market share, replacing revenue lost due to the Commerce Department's action.

That's probably why Ambarella shares aren't suffering the full weight of a 15% loss of revenue in today's trading, but "only" a 10% loss instead.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ambarella, Inc. Stock Quote
Ambarella, Inc.
AMBA
$72.86 (6.41%) $4.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.