Amba

Image source: Ambarella.   

Shares of Ambarella (NASDAQ:AMBA) have come under fire in recent weeks, setting the stage for its important quarterly report after Thursday's market close. The provider of video compression and image processing semiconductors has seen its stock shed more than half of its value since its summertime peak, and it can't be very comforting for shareholders to know that things started to come undone the last time it posted fresh financials.

Ambarella's fiscal second quarter was solid on the surface. Revenue skyrocketed 79% since the prior year, making this the fifth straight quarter where revenue growth has accelerated, according to S&P Capital IQ data. Adjusted earnings soared 150%. 

The sticking point in the otherwise stellar report was Ambarella's conservative guidance, especially as it pertained to its video chips that fuel GoPro (NASDAQ:GPRO) wearable cameras. Shares of Ambarella and GoPro haven't been able to recover, down 35% and 54%, respectively, since Ambarella's problematic second quarter was announced. 

Ambarella has held up better than GoPro because it also provides video compression and image processing solutions for surveillance gear, automotive dashboard recorders, and broadcast infrastructure encoders. Ambarella had primarily raised red flags with its wearable camera business. 

There's naturally a lot riding for Ambarella, and it's probably not a good omen that the otherwise bullish Brad Erickson -- an analyst at Pacific Crest -- slashed his price target on the stock from $102 to $77. His concern rests largely on weak inventory trends at GoPro. Channel checks at the country's leading consumer electronics retailer saw uncomfortably high levels of inventory. That may not seem like a scary notion ahead of the holiday shopping season, but with mobile and cheap 4K TVs dominating initial interest for big-ticket purchases, it could result in a glut of inventory come January.

Ambarella has still been one of the market's biggest winners since going public at $6 three years ago. However, with the stock trading well below its all-time highs and concerns about a slowdown in its wearable camera business, it's clear that the market will have more questions than usual on Thursday. A strong quarter was tripped up by weak guidance last time out. The bar isn't as high this time around, but Ambarella will have to make sure that it doesn't rain on the market's parade like it did three months earlier. 

Rick Munarriz owns shares of Ambarella. The Motley Fool owns shares of and recommends Ambarella and GoPro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.