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Ambarella (AMBA) Looks Bright Post Q3 Earnings: Time to Hold?

Zacks

A successful investor understands the importance of retaining well-performing stocks in the portfolio at the right time. Indicators of a stock’s bullish run include a rise in share price and strong fundamentals. Though there may be some concerns regarding the stock but they are transitory in nature.

Ambarella Inc. AMBA is one such technology stock that has been on healthy growth trajectory, of late. It has rallied 52.8% year to date, outperforming 9.2% growth recorded by the industry it belongs to.

Let’s now delve deeper and take a look at some of the aspects aiding the company’s performance.


Upbeat Q3 Results

Ambarella reported better-than-expected results for third-quarter fiscal 2018, keeping its earnings streak alive for the 10th time in a row. In fact, the company beat its projections at every point — revenues and margins.

The company’s fiscal third-quarter revenues of $89.1 million surpassed the Zacks Consensus Estimate of $89 million and came toward the higher-end of management’s guidance range of $87.5-$90.5 million. Moreover, excluding sales to GoPro, revenues were up 7.2% to $70.6 million. Sales to GoPro significantly declined year over year from $34.6 million to $18.4 million.

On per share basis, the company’s earnings came in at 75 cents, well ahead of the Zacks Consensus Estimate of 66 cents.

Positive Earnings Surprise History

Ambarella has an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in the trailing four quarters, recording a positive average earnings surprise of 12.8%.

Further, it has a long-term expected EPS growth rate of 14.7%.

Other Growth Drivers

Ambarella is well known for its market leading high performance video processing SoCs, which consume lowest power in this space. The company’s proprietary video and image processing SoCs are highly configurable, providing it a cost and power advantage against rivals, which use multiple expensive semiconductors in their video and image processing solutions. This makes Ambarella a suitable choice for wearable camera, IP camera, automotive dashboard cameras and drone camera makers.

In a move to diversify business and lower dependency on GoPro, Ambarella has forayed into the VR camera space by launching H3 SoC in January this year. The company claims that the chip will work wonderfully for high-end drones and VR cameras. Although it will be very tough for Ambarella to compete against well established players such as NVIDIA NVDA and Advanced Micro AMD, we believe that given its track record of innovation, the company has the potential to strengthen its position in the space.

Risk Remains

Nonetheless, the company’s disappointing guidance for the forthcoming quarter as well as downbeat revenue outlook for fiscal 2018 makes us increasingly cautious about its near-term prospect.

Going forward, the company faces three main challenges, the risk of losing its largest customer, GoPro; weakness in the drone market and increasing threat from QUALCOMM QCOM, which is acquiring NXP Semiconductors to augment its presence in the same space.

Other Key Picks

Currently, Ambarella carries a Zacks Rank #3 (Hold)

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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