AMBA Stock: Does This Spell the End for Ambarella Inc?

AMBA StockIs GoPro a Threat to AMBA Stock?

This Thursday morning, it felt like the trumpets were sounding for Ambarella Inc (NASDAQ:AMBA) as nervous bulls helplessly watched a chaotic sell-off in AMBA stock.

Is it doomsday for Ambarella shareholders?

Before we head over to discussing Ambarella’s future fate, I’d like you to consider the following scenario and address the question posed at the end:

Person A is notorious in a neighborhood for leading a scandalous life. Neighbors often see Person B sharing a smoke with A, his next-door neighbor, when they cross paths. Neighbors now assume that B leads the same scandalous life as A.

The question: are the neighbors fair in their judgment of B?

Ambarella Stock “Guilty by Association”

Psychologists define such an ad hominem attack on B for his connection with A as the “association fallacy,” which is an illogical belief that since B shares something trivial in common with A, B must be the same as A.

Does this scenario ring a bell?

Coming back to Ambarella, the only remote reason for its recent demise is its affiliation with GoPro Inc (NASDAQ:GPRO). In case you don’t know, the former supplies semi-conductor chips that power the cameras sold by the latter.

Yes, Ambarella is nothing more than a victim of the association fallacy.

Simply put, Ambarella is crashing because one of its customers, GoPro, is facing slowing demand for its cameras. On the contrary, no significant negative news has come out of Ambarella in recent days. In fact, all the news released beginning this year bore a positive outlook for the company. Yet AMBA stock has tanked 10% in just one day and more than 20% in the last five.

Take note that Ambarella had forewarned of GoPro’s problems ahead of time. During the quarterly call in December, Ambarella guided for a soft first quarter in the New Year, citing weakening demand for its wearable camera chips. Needless to say, this guidance was a hint at slowing demand for GoPro cameras.

What’s Next for Ambarella Stock?

Now, recall that AMBA stock took a plunge on this guidance in December, despite posting great numbers for that quarter. Since this news was already priced in back then, Thursday’s massive sell-off becomes completely unwarranted.

Additionally, the first quarter of this year may be turbulent for the company, after GoPro slashed its supply from Ambarella. But following quarters will likely pull robust growth for the company, because Ambarella’s business is increasingly diversifying beyond GoPro.

The wearables segment is just one side of its business. Ambarella’s other segments have, on the contrary, been going strong. Last week, at the Consumer Electronics Show (CES 2016), the company introduced two new next-generation chips for its flying camera and sports segments that are being touted as game-changers for the company.

Meanwhile, both its automotive and security cameras segments bear great growth prospects in the coming year. The automotive segment will particularly be getting a boost from the growing demand in driverless and semi-autonomous driving technologies, where high-performance cameras play a pivotal role.

Even in the wearables segment, bears often forget Ambarella’s other big customers, like Xiaomi and TASER, which will continue to drive revenue for the company, even if GoPro fails.

The Bottom Line on AMBA Stock

Ambarella shareholders shouldn’t fall for Thursday’s selling frenzy that had little to do with the company’s fundamentals.

The company holds a strong and diversified portfolio of SoC (system on a chip) clients that will continue to pull in revenue for the company and returns for AMBA stock, even if we take GoPro out of the equation.

Plus, with about 46% of its float short as of December 31, 2015, we’ll likely soon see a significant short squeeze that will likely add to AMBA stock’s northward journey on the charts.