Flying Cameras Could Be Huge for AMBA Stock
High-end camera chip manufacturer Ambarella, Inc. (NASDAQ:AMBA) has been one of the most speculative investments this year. The stock has been caught in a downward spiral, having fallen over 54% in less than five months. However, Friday’s rally has rejuvenated stockholder sentiments. Here’s why I’m hopeful that AMBA stock might finally be making a rebound to its all-time summer highs.
Ambarella’s fate is often wrongfully tied with one of its clients, GoPro, Inc. (NASDAQ:GPRO). GoPro has been losing on the market, with meager earnings results and a guidance cut for the future quarter. Now, Mr. Market views GoPro’s lackluster performance to be a hint on Ambarella’s third-quarter results, which the company is expected to report on December 3.
What Mr. Market forgets, however, is that a major chunk of Ambarella’s revenue comes from the company’s other clients, both in the U.S. and abroad. The company also has diverse product lines and has recently guided in-line with analyst estimates for 3Q15. I’m positive that AMBA stock will not miss its targets in the latest quarter and will recover from its fall in 2016.
Here’s why I’m seeing a rosier picture than Mr. Market.
This Is Big News for AMBA Stock
I’m seeing two of its segments to be making solid contributions to its earnings, going forward: security IP cameras and flying cameras.
Ambarella has already been successful in receiving contracts from the defense sector where the two camera types enjoy high demand. In addition, demand for high-end audio, video, and still-imaging chips in the fast-growing drone industry bodes well for Ambarella, which remains one of the top chipmakers in the industry.
The biggest bit of good news for Ambarella is that the Federal Aviation Administration has given a green signal to the drone industry, and as the government regulations continue to be relaxed, this niche could grow to a massive $82.0-billion industry in a decade’s time. (Source: “State vs. state: FAA breaks down winners, losers in growing drone market,” Fortune, September 20, 2015.)
Not only is the defense industry investing in this area, but so are big corporations. Amazon.com, Inc., Wal-Mart Stores, Inc., and Alphabet Inc are all heavily investing in their soon-to-be-launched drone delivery services. On the other end of the spectrum, consumer demand for drones is also on the rise. Wal-Mart, for instance, is seeing a 100% increase in consumer interest for drones in its pre-Cyber Monday searches compared to last year. (Source: “Walmart Releases All 2,000 Cyber Monday Deals Sunday Night at 8 P.M.,” Seeking Alpha, November 23, 2015.)
Currently, only 10% of Ambarella’s revenue stream is tied to the drone segment, but as this industry captures greater growth, Ambarella’s flying cameras segment could potentially become the biggest source of revenue for the company. The drone market is still raw, with only a handful of companies modestly investing in this business. The next big competitor in the arena that stands over Ambarella is AeroVironment, Inc. (NASDAQ:AVAV). AVAV may currently be receiving more contracts from the U.S. Department of Defense, but its unprofitability and narrowed focus on just one segment makes it a less viable investment than AMBA stock.
In terms of technicals, AMBA stock has found support at its current levels a number of times before. The current short interest of more than 44% in Ambarella stock creates a very possible chance of a breakout from another short squeeze.
Chart courtesy of www.StockCharts.com
Amid the recent political and economic upheavals in the Middle East, Europe, and China, and the domestic uncertainty over the Fed’s future monetary policy, market volatility was inevitable. Traders took over the market, short selling spiked, and the average investor was left confused, trying to make sense of all of it. In times like these, remember that all the legendary investors-turned-billionaires always think long-term.
The Bottom Line on AMBA Stock
Despite getting badly beaten down on the market, AMBA stock is still up over 14% in its year-to-date run, while the S&P 500 index is only up 1.7%. Not a very shabby performance, after all! The company has a clean balance sheet with no debt and strong cash reserves, it has high margins, and it is strategically placed near the top in a strong growth industry.
The bottom line: AMBA stock may have a promising upside in the long run.