Tuesday, June 18, 2024
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Key Points

  • Ambarella plunged 20% on weak guidance, opening up an opportunity for investors. 
  • Institutions and analysts support the stock and have put a bottom in the market. 
  • Ambarella, a leader in computer vision technology, is expected to return to growth in Q1 of the next fiscal year. 
  • 5 stocks we like better than Ambarella

Ambarella’s NASDAQ: AMBA stock shed 20% following the Q2 report and guidance, but don’t read too much bearishness into the news. The company is focused on next-gen computer vision technology with low revenue levels, and it is lightly traded, making it susceptible to bad news.

The takeaway for investors is that near-term headwinds have opened up an opportunity in a long-term play that should deliver solid returns over the next several years. Here’s why:

Ambarella is Fundamental to Computer Vision and the Future of AI

If you think AI is hot now, wait until computer vision begins to gain traction. R2-D2 is nothing but a fancy chatbot without the ability to see. Make it see, and R2 D2 becomes an autonomous machine capable of moving, manipulating objects, and making decisions. As it is, the industry is in its early phases, with players like Ambarella leading the way. The company is leveraging its years of experience with imaging and image processing to usher in the next generation of computer vision at the edge of computing.

Computer vision spans the range of light and motion sensing through image capture, 3-D vision, object detection, and what to do about something once it’s “seen.” Applications for computer vision are near endless and run from facial recognition and security through autonomous vehicles and consumer products such as drones. The industry is valued at roughly $14 billion in 2022 and is expected to grow at a 20% CAGR for at least the next 7 years. Widening use of the IoT and advances in technology will accelerate the growth.

Ambarella is Caught Up in Industry Normalization

Ambarella had a mixed quarter, but nothing in the report was bad enough to send shares down 20%. The top line came in weak, and the weakness is expected to linger longer than previously thought, but a return to growth is at hand. Areas of weakness in end markets compounded industry normalization, but inventories are expected to return to growth levels by the end of the year.

Ambarella is managing its inventory well, with it falling 14% YOY, and the balance sheet is in great shape. The company’s cash position is up almost $9 million or 8% and only partially offset by the inventory reduction. The analysts are trimming their targets for this year, which may weigh on the action over the next few months, but the outlook for next year remains robust. Ambarella analysts expect 28% top-line growth, which should lead the market higher over time.

The Analysts and Institutions Put a Floor in the Ambarella Market

The analysts are trimming their stock price target for AMBA, but they are bullish on the name. The consensus rating of 19 analysts tracked by Marketbeat.com is a Moderate Buy with a price target about 40% above the current action. The Moderate Buy has been firm and steady over the last 12 months, but the price target has been trending lower. Many fresh targets are below the consensus, including the new low, which not 1 but 2 firms set. The good news is that the new low is $65 and is above the current price action, implying a rebound is brewing; the only question is when it will form.

Institutions have also put a bottom in the stock. The institutions own about 80% of the stock and have bought at a pace of 2.65:1 compared to sellers over the past year. Their activity coincides with bottoms in Q4 2022 and Q2 2023 and is expected to produce a base again now that prices have retreated.

The Technical Outlook: Ambarella is Range Bound

Shares of Ambarella fell 20% following the report and showed resistance at the 150-day moving average but failed to hit the bottom of the trading range, and support is evident at the session’s low. The solid signal reveals a range-bound market that will likely remain range-bound over the next quarter. The takeaway for investors is that the sell-side is buying this stock at the bottom of the range, and the business is set up for growth and long-term success.

While Ambarella currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.

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