Ambarella Has Ample Room To Run
If you think chipmakers like Ambarella (NASDAQ: AMBA) are getting overheated you may be right. The valuations on some of these stocks is through the roof but they are assuming robust growth driven by the global chip shortage, the rollout of 5G, data center and cloud-computing growth, and the evolution of the industry. Ambarella itself is at the forefront of computer vision/AI and the wide-ranging impacts of that industry (self-driving cars, automation, etc).
It is our opinion that cutting-edge and highly specialized chipmakers like Ambarella are poised not only to benefit from the chip boom but to drive innovation and the advancement of the technology. Why spend too much time catching up on demand for older, slower, less useful chips when we can focus on newer, faster, more useful chips instead?
Ambarella Leads Market With Price Target Increases
The analysts have been busy in the first two weeks of the year upgrading and downgrading stocks left and right. Within that activity, Ambarella received 6 upgrades and/or price target increases from among the 15 analysts covering the sock. The activity includes one rating upgrade from Equal-Weight to Overweight and 6 price target increases that bring the group into alignment with the broader consensus. The Pricetargets.com consensus sentiment is still only a weak Buy so there are analysts still on the fence that could be swayed. The Pricetargets.com consensus estimate for share price, however, is a little more bullish than that.
The consensus price target is $220 and is 40% above the current price action. The high price target of $260, set in the wake of the last earnings reports, implies another 18% of upside on top of that. Wells Fargo analyst Gary Mobley, responsible for the latest upgrade, says Ambarella is the purest play on AI/vison at the edge as well as autonomous driving and advanced driving algorithms. In his view, the company is on the cusp of mass-market adoption and an increase in market share. He also thinks the recent pullback in prices makes the stock more attractive too.
Institutional activity in Ambarella has been robust this year with both profit-taking and new money flowing in. The net activity has been bullish on a quarter-to-quarter basis for the last 11 quarters with buying in 2021 equal to $454 million or about 8% of the market cap with shares trading near $165. On the flip-side, the insiders have been selling some shares but there are no red flags in the data that we see. The selling is light, periodic, spread among several individuals, and looks to us like compensation-related stock sales to us.
The Analysts Are Underestimating Ambarella’s Q4 Results
As bullish as the sell-side is on Ambarella we think they are underestimating the Q4 results. The consensus estimate is calling for a slight sequential downtick that is supported by history but not by current conditions. With demand so high, OEM’s scrambling for supply, and EVs/self-driving picking up momentum, we are expecting a sequential increase good for YOY growth greater than +50%. And we think our own estimate could be too low.
Looking at the charts, the stock sold off hard the first week of 2022 along with the rest of tech making a deeper and more prolonged pullback than others in the group. This is setting up a great buying opportunity with share prices already showing support at the previously strong $150 level. Assuming this level holds we see price action consolidating prior to earnings and then moving higher, possibly much higher, going into and/or coming out of the Q4 reporting period. Amberealla next reports in early March.
Companies in This Article:
