Ambarella: Wait To Buy, But Don't Wait Too Long

| About: Ambarella (AMBA)
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Ambarella continues falling on the weak holiday sales from prime customer GoPro.

The stock is cheap now, but a rebound will require a catalyst that, ironically, could reside with GoPro.

The recommendation is to wait before buying the stock, but don't forget to keep Ambarella on the shopping list.

With Ambarella (NASDAQ:AMBA) dipping down in the $30s, the stock easily falls into the value arena now. The question is whether the stock will actually rebound from these new lows. My previous warning was that the stock would struggle whether or not it had reached the value point.

The catalyst for the latest drop was naturally the GoPro (NASDAQ:GPRO) warning Wednesday evening. The action camera maker helped propel Ambarella to the stratosphere last year and now GoPro continues pulling it down. Ambarella closed at $42 on Thursday for another 6% selloff due to the issues from the prime customer.

Only a few days ago, Ambarella traded at $45 due to the previous warnings of a weak holiday from inventory back ups in the action camera category that includes GoPro as the primary customer.

Now the question is whether the FY17 estimates of $3.23 per share will hold following the disappointing numbers from GoPro. As a summary, the action camera maker missed Q4 revenue estimates by a wide margin. The company now forecasts revenues of $435 million, down from an estimate of at least $500 million and a consensus of $512 million.

What isn't clear is the immediate impact to Ambarella. The company had previously issued tepid guidance for the current quarter due to GoPro having a 100-day inventory supply of cameras starting the quarter. One can't imagine that expectations were high for additional revenue from them for FQ4 that ends this month. The real impact is the current quarter and the 1H'16.

Ambarella would not quantify on the last quarterly earnings call the level of revenues projected from the action camera market. All the CFO would say is the following:

The Company also expects that Q4 growth in these markets will be offset by a substantial decline in year-over-year revenues from the wearable sports camera market. In the wearable sports camera market high customer inventory levels at the end of calendar Q3 are expected to have a substantial impact on our shipments in Q4 extending into Q1 of fiscal year 2017.

The real suspect is a likely expectation at this point that GoPro would clear out the inventory over the holidays and that isn't likely the case now. Ambarella forecast some extension into FQ1, but the reality is bigger than expected.

What investors can count on though is that GoPro is likely to have a blowout 2H this year with both the release of a quadcopter in the May/June timeframe and a refresh of the action camera product. Without a refresh this past year, demand should rebound strongly for the 2016 holidays.

The combination is good for Ambarella in that the flying cameras have higher margins and naturally a rebound in the sports camera market will help showcase the growth in other areas like security cameras and dash cameras.

The short-term hit is likely the FQ1 report forecasts will have to drop. The ongoing weakness from GoPro is likely to linger into that quarter versus the projection of a rebound in orders to refresh inventories.

The analyst forecasts for FQ1 revenues of $68.5 million will need to come down. The $1 million sequential increase likely turns negative. In addition, the EPS estimates will need to take a hit from the current $0.49. Both of the new numbers will show substantial YoY declines.

The key takeaway is that cheap is not a catalyst for higher stock prices. Ambarella needs to get beyond the year-end weakness from the action camera market before the stock can rebound. The good news is that GoPro is already lined up to return to growth by 2H'16. The other markets were already aligned to generate a growth rate of 15% to 20%.

Ambarella is a value play now, but the stock isn't going to rebound until heading into FQ2, assuming the company can return to sequential revenue growth at that time. With the ability to maintain FY17 EPS estimates of at least $3 (a nearly 10% cut from current levels), the stock is trading for roughly 14x estimates. Wait for a better entry point after the dust settles, but don't wait too long.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.