Ambarella To Hit $150 By Year-End

Secular Forces Drive Ambarella Higher

We were expecting great news from Ambarella (NASDAQ: AMBA) and that's what we got. The company's forays into artificial intelligence and computer vision are paying off in spades. The company's latest earnings report reveals accelerating revenue that has the company performing above its pre-COVID levels and on track to regain the lofty heights hit during GoPro’s heyday. The company's business is supported not only by the global shortfall in microchips but also by new product cycles in existing businesses and emergence into new markets. In our view, Amberella is among the most exciting of the semiconductor stocks and the semiconductor industry as a whole is looking pretty good right now.

Ambarella Has Blowout Quarter, Initiates Q3 Guidance

Ambarella reported $79.30 in revenue to beat the consensus by 450 basis points. The strength was driven by its AI/IoT-connected camera business which accounted for about 90% of net revenue. This is significant and includes not only industrial applications for computer vision but also for the OEM  and automotive aftermarkets. In terms of growth, the revenue is up 58.3% over last year and 40.5% over the same period in 2019.

Moving down the report, the details get better and better. The company reported improvement in the GAAP and adjusted gross and operating margins. On a GAAP level, the gross margin improved by 50 basis points to 60.3% driving a better-than-expected result on the bottom line. The company produced a GAAP loss due to stock-based compensation offsets and reinvestment in growth but the loss was halved on a YoY basis. On an adjusted basis, the gross margin improved by 40 basis points to 62.8% and drove a 450 basis point improvement in operating margin. On the bottom line, the GAAP loss of $0.20 beat the consensus by $0.06 while the adjusted EPS of $0.35 beat the consensus by $0.10.

The company initiated third-quarter guidance along with the second-quarter results and the guidance is very good. The company is expecting sequential acceleration to continue into the third quarter and for revenue to outpace the consensus estimate by a wide margin. The revenue guidance of $88 to $92 million compares to a consensus of $78.50 million and will be accompanied by a flat to slightly weaker margin. Regardless, the adjusted earnings should outpace the consensus of $0.26 buy at least a dime and up to a quarter dollar.

Share BuyBacks Are On The Table For Ambarella

Ambarella did not buy back any of its shares during the second quarter but the board of directors extended the time period for the existing buyback authorization. The company has  $49 million left under the buyback authorization which is now in effect until June 30th of 2022. Based on the companies rapidly improving capital position we think buybacks will begin soon and could easily use up the current allotment. The company's balance sheet is carrying  $449.20 in cash and short-term securities which Marketbeat.com data reveal is up 3.25% sequentially and more than 9.25% from last year. This puts the company in a sound position to continue executing its plans as well as buy back shares and the company has almost no debt to speak of.

The Technical Outlook: Ambarella Fires A Strong Trend Following Signal

Shares of Ambarella popped 10% in after-hours trading following the release of the second-quarter report. The move confirms support at a key level and has triggered a strong trend following entry signal. The caveat for investors is that price action may retreat in the near term to close the gap formed with today's action. In that event, support might be found in the range of $104 to $110. If the market follows through on early action after the open, shares of Ambarella could be retesting resistance at the $120 level vert soon. $120 is an important resistance point coincident with the GoPro-induced spike and crash that, once crossed, will bring price targets in the range of $120, $140, and $200 into play. in our view, Ambarella will be trading near $200 within the next year or so.