When a stock loses 60% of its value in eight months, you know things are bad. But sometimes sentiment can change rapidly. On Tuesday, March 29, Ambarella Inc (NASDAQ:AMBA) stock surged 9.31%.
Before we go into why it spiked, let’s not forget Ambarella stock’s disappointing performance since last summer. After reaching $124.23 a share in July, AMBA stock went on a freefall. Even after Tuesday’s surge, the stock is still down 64.2%. Ouch!
Can AMBA Stock Go to $55.00?
There is a reason why the stock is down—its main customer hasn’t been doing that well. As a maker of high-definition video-capturing and processing chips, Ambarella was selling a lot of products to action camera maker GoPro Inc (NASDAQ:GPRO). Back in the summer, Ambarella was earning one-third of its revenue from GoPro.
The high customer concentration of Ambarella’s business worked as a double-edged sword. When GoPro was doing great, Ambarella stock soared through the roof. But then as GoPro’s business started showing weakness, the relationship dragged AMBA stock down as well.
Now, a major Wall Street firm is saying that the worst could be over for Ambarella.
On Tuesday, Morgan Stanley (NYSE:MS) upgraded its rating on Ambarella stock from “Equal Weight” to “Overweight” with a price target of $55.00. This would imply a 23.6% upside in AMBA stock. (Source: “Ambarella Surges Seven Percent: Morgan Stanley Says Buy on Computer Vision Story,” Barron’s, March 29, 2016.)
Joseph Moore, analyst at Morgan Stanley, believed that the outlook has gotten better for Ambarella. On the GoPro side, the analyst believes that the company’s GoPro business has “bottomed.” His team is expecting zero shipments to GoPro in the first half of 2016.
Since the expectation is zero, Ambarella’s GoPro business can only get better. The camera maker is going to launch its “Hero 5” line of products, which would use a new chip from Ambarella. But the demand probably won’t be as high as before. The analyst estimates that “the seasonal peak this year would be about 50% below prior peak levels.”
What could really change AMBA stock’s outlook are the other segments of the company’s business. For instance, the drone market could be the next big thing for Ambarella.
Earlier this year, the company introduced the “H2” and “H12” camera chips, which would allow drone cameras to function much better in low-light and high-contrast situations. The new chips also help make videos smoother. The best part is that they could potentially eliminate the need for mechanical gimbals, which have been costly and cumbersome on drones. With the new technology, Ambarella could become a major supplier for drone makers.
Also, the upcoming autonomous car industry could be a huge catalyst for AMBA stock. For a car to drive by itself, it would need to process complicated road and traffic information. That’s where Ambarella’s video processing capacity can come into play. Moreover, the company has improved its competitiveness by acquiring autonomous vehicle technology company VisLab last year. VisLab’s self-driving vehicle made a monumental 13,000-kilometer (approximately 8,078 miles) autonomous trip from Italy to China in 2010. (Source: “Ambarella Acquires VisLab, a European Developer of Computer Vision and Intelligent Automotive Control Systems,” Ambarella Inc, July 1, 2015.)
The Bottom Line on AMBA Stock
There you have it. No matter how bad the situation is with its GoPro business, there are still quite a few catalysts that could bring AMBA stock back up again.