Ambarella Is A Buy For Patient Investors

Ambarella Is A Perfect Fit For Q2 Portfolios 

Ambarella’s (NASDAQ: AMBA) shares have been under intense pressure over the past few quarters but we think the bottom is in. The stock price was under pressure due to fears of slowing growth, the impact of the Omicron variant, supply chain issues, and lockdowns in China but it looks like the worst is behind the company now. While the 2nd quarter results are expected to be impacted by those issues, not only is the supply chain starting to show signs of improvement but lockdowns in China have eased and production in the region is on the rise. In this scenario, we see not only improvement within the supply chain but a chance for the company to gain momentum and for revenue growth to reaccelerate. 

“During Q1, the pandemic flared up in China and the resulting lockdown disrupted customer production schedules and orders placed on us, as well as logistics in the greater Asia supply-chain. A majority of our customers’ products are manufactured in this region and subject to impacts from China-related supply-chain disruptions. We are seeing a similar degree of impact across both our automotive and IoT businesses, further complicating the pre-existing kitting issues we have discussed before,” says CEO Fermi Wang. 

Ambarella Has Strong Quarter, Guides Weak 

Ambarella had a strong quarter with both revenue and earnings in excess of the consensus. The problem is the guidance for Q2 is well below the Marketbeat.com consensus estimate and there may be downside risk in the number. Until then, the Q1 revenue of $90.31 million is up 28.8% versus last year and beat the consensus by 240 basis points. The strength was driven by demand in key growth markets including the higher-margin computer vision product line. 

Turning to the margin, the company was able to widen both the GAAP and the adjusted gross margin with the adjusted gross margin up 90 basis points YOY. The only bad news is that the operating margin narrowed but this is due primarily to one-off factors that are either non-material to results or will drive results down the road. Those being an increase in share-based compensation and a near-33% increase in R&D spending. 

As for the guidance, the guidance for both revenue and earrings is well below the consensus figure but not because the business is failing. If anything, demand for the products is growing so we see the weakness as a passing issue and not one that will impact share prices long. The risk for the market is that economic conditions will change enough over the next 6 to 12 weeks and offset the expected recovery in product availability. In that scenario, the entire stock market will be in for a deeper correction than what it has seen so far. 

The Analysts Are Still Buying Ambarella 

The analyst are still buying Ambarella but the price target is slipping. At least 7 of the 16 analysts covering the stock have come out to lower their price targets and this may not be the end of the trend. The good news is the Marketbeat.com consensus rating of firm Buy is holding steady in the 12, 3, and 1-month comparisons and is still 73% above the current price action. Even the low price target of $100 implies more than 15% of upside and we think that is the least of what investors can expect by the end of the year. 

Price action in AMBA fell in premarket trading and opened with a gap lower but buyers are already scooping up shares. The price action is confirming support at the $80 level and the short-term moving average and could easily move higher in the near term. The next hurdle will be resistance at the $102 level which we think will not last long. The risk for the market is resistance at the $120 which we think will cap gains unless there is positive news to support the market.