Ambarella (AMBA) Bears the Brunt of a Price Target Cut

Roth Capital's Sujeeva De Silva now calls for just 4% in return potential for AMBA shares following an underwhelming FQ2:19 guide.

Ambarella (NASDAQ:AMBA) has investors in a tizzy today despite earnings that flew above the Street’s first fiscal quarter expectations for 2019. The trouble roars in the direction of the camera component maker’s second fiscal quarter guide, which has come up shy of Street-wide expectations- and sent shares crashing 12% today.

Roth Capital analyst Sujeeva De Silva stays on the sidelines and dials down his target expectations to account for “near-term headwinds” that are “offsetting growth areas.”

On back of the quarterly show, the analyst reiterates a Neutral rating on AMBA stock while cutting the price target from $50 to $45, which implies a close to 4% upside from current levels. (To watch Silva’s track record, click here)

For the first fiscal quarter of 2019, the company’s revenue met consensus expectations with EPS rising past, indicating a 12.5% year-over-year dip in revenue once the GoPro content loss has been factored.

“We believe AMBA represents a differentiated investment opportunity in low power video and computer vision processor. We believe AMBA is experiencing headwinds in certain consumer segments offsetting growth across security camera and automotive. We also remain cautious around the potential geopolitical IP security camera demand disruption in China,” explains De Silva.

The first fiscal quarter was helped from professional security coupled with automotive strength, but unfortunately suffered a far sharper-than-anticipated tapering off in demand for consumer VR and sports wearables, as well as sustained lackluster drone demand. Accounting for the mix shift, the analyst now looks for gross margins to pace closer to the bottom-end of the longer-term target range when glancing ahead to the upcoming quarters. When sizing up the second fiscal quarter revenue guide of 5% to 12% quarter-over-quarter growth, the analyst sees subdued seasonality and sustained solid automotive and IP security camera demand. The AMBA team likewise cut its fiscal 2019 revenue growth outlook from 10% year-over-year growth to flat year-over-year growth, adjusting for GoPro.

The camera component maker has good odds to magnetize non-China customer share, which would partially leverage for prospective loss at China security camera customers. Additionally, in the automotive arena, the analyst wagers computer vision chips could offer an upgrade cycle prospect kicking off in the upcoming year to two years.

De Silva surmises, “We believe AMBA has a more muted near-term growth opportunity in FY19 reflecting weaker than expected consumer demand across VR and sports wearable segments. We expect AMBA to maintain a strong growth opportunity in IP security cameras and automotive, and are encouraged that AMBA is already sampling computer vision products and recording revenue from its automotive OEM products. However, we also remain concerned about a macro headwind related to potential China trade bans, and the impact on AMBA video processor sales to China IP security camera customers,” adding he needs to see clues of better “fundamental” year-over-year growth compares and a clearer picture on the China geopolitical backdrop before becoming more positive on Ambarella’s name.

TipRanks indicates caution with optimism baked into expectations on AMBA stock’s opportunity. Out of 7 analysts polled in the last 3 months, 3 are bullish on AMBA stock while 4 remain sidelined. Notably, the 12-month average price target stands tall at $53.60, marking nearly 24% in upside potential from where the stock is currently trading.

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