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Why Ambarella Tumbled More Than 19% Today

By James Brumley – Jan 5, 2022 at 4:56PM

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Changes to the market environment have suddenly cast the camera technology outfit's potential in a less bullish light.

What happened

Shares of digital camera technology company Ambarella (AMBA -3.39%) ended Wednesday down to the tune of 19.3%, bringing the stock's two-day rout to a total of more than 23%. The broad market's weakness caused most of the damage, although Ambarella shares began the new week as well as the new trading year highly vulnerable to such a setback.

So what

Don't look for a specific catalyst for the sell-off. You won't find one. Indeed, Ambarella's unveiling of a new artificial intelligence-powered image processor on Wednesday morning arguably should have prodded the stock upward again after Tuesday's lull. Investors have been quick to bid the stock up on even the most modest of news since the middle of last year.

Rather, look to the market's overall weakness on Wednesday for an explanation of Ambarella's setback. The release of the minutes from the most recent Federal Reserve governors meeting suggests the central bank is turning increasingly hawkish, now with three rate hikes anticipated for this year to be followed by five more by the end of 2024.

Falling stock chart on a computer screen.

Image source: Getty Images.

Rising interest rates meant to curb economic overheating take a disproportionate toll on growth stocks like Ambarella. And already up more than 360% from its mid-2020 low, its shares were among the market's top profit-taking targets. The volume behind today's selling was particularly pronounced, suggesting the sell-off isn't mere volatility. Institutions as well as insiders may be dumping the stock as well, before unrealized losses are allowed to get any bigger.

Now what

The sharp sell-off isn't an indictment of the company's business, to be clear. Ambarella is shrugging off the impact of a global chip shortage, on pace to produce revenue growth of 49% this fiscal year, which should in turn generate per-share earnings of $1.57. Next year's projected bottom line of $1.92 per share should come on the heels of a 20% improvement in its top line. The world needs the company's tech, for self-driving vehicles in particular. Deutsche Bank and a couple of other analytic firms even reiterated their mostly bullish calls on the news of an improved AI image processor, with a couple of price target increases being put in place today. The current consensus target now stands at $221.44, according to The Wall Street Journal, 34% above Wednesday's closing price of $165.40.

This is a scenario, however, where an overextended and overvalued stock is coming to terms with its steep valuation. The sheer scope of Wednesday's meltdown may hint of more right-pricing to come, as investors search for a palatable price in light of a new market environment that no longer seems to favor expensive growth stories.

At the very least, interested investors will want to remain on the sidelines for now and let the stock's price find some stability before jumping in. The market itself, of course, will need to cooperate.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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