Ambarella Guidance Priced Into The Market
The market for Ambarella (NASDAQ: AMBA) is imploding despite the company’s strong results and outlook for 2022. The key takeaway is the company is doing a strong business, gaining market share, and providing positive guidance but the news is all priced into the market. As good as the results are, they were only in line with the analyst's expectations and the guidance for Q1 is flat to only slightly positive.
In our view, the weak guidance is due more to supply chain hiccups that have end-markets like the OEM auto industry curbing production. In that light, we see upside risk in the outlook and an opportunity for investors in the share prices. The stock is trading at the lowest levels it’s seen in nearly 6 months and there is no change to the outlook, only a slight hiccup that we see leading to acceleration for both Ambarella and the broader economy in the second half of 2022.
The analysts are still bullish on the stock but they’ve begun to lower their price targets. There’ve been at least 6 sell-side analysts out with reports since the Q4 report was released and all included a price target reduction. The consensus of the 6 is close to $171 compared to the broader Pricetargets.com consensus of $196 which implies about 75% of upside for the stock. The consensus rating is still a firm Buy and we don’t see that changing until the fundamental story driving the semiconductor industry is played out. We don’t think that will change for at least a year or two, probably longer.
Ambarella Falls On Mixed Results, Weak Guidance
Ambarella did not have a bad quarter only one in which the revenue and earnings were completely priced in by the market. The company reported $90.23 million in revenue which is down sequentially but up 45.2% over last year and exactly as expected by the Pricetargets.com consensus figures. Revenue was driven by strength in all end markets with a notable pick-up in computer vision. Computer vision more than tripled and now accounts for more than 25% of the revenue.
The good news is that margins widened and more than expected to produce a better than expected figure on the bottom line but that’s about as good as the news gets in terms of things that might excite the market. The GAAP gross margin improved by 270 basis points, adjusted by 340, with the operating margin up triple digits. On the bottom line, the GAAP loss of $0.25 beat by a dime while the adjusted $0.45 beat by $0.03.
Looking forward, the company is guiding strong and for revenue to maintain the gains set over the past year but growth is definitely slowing. Management set the range for Q1 revenue at $88.5 to $91.5 million compared to the consensus of $90.18 which opens the door for another sequential decline. In our view, revenue should still be ramping so this guidance is lackluster at best.
The Technical Outlook: Ambarella Is Overextended
Shares of Ambarella have been in retreat for months and moved sharply lower in the wake of the Q4 release. While the selling may worsen, there are signs emerging that point to an overextending market. The primary signs are divergences in both the indicators. The MACD and stochastic are both forming glaring divergences from the new lows and suggest the chances for a snap-back rally or reversal are growing.
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