Ambarella Inc: Channel Checks Point to Earnings Miss, Significant DownsideVW Staff
Prescience Investment Group, the short biased value research firm, has just issued a strong sell on Ambarella Inc (NASDAQ:AMBA). Their channel checks point to earnings Miss, and they see significant downside. They believe that the stock which is trading at $15.05 in pre market hours, is worth closer to $11.40 a share.
We believe Ambarella Inc (NASDAQ:AMBA) (“AMBA” or “the company”) will miss the Street’s FQ3’14 consensus estimates, resulting in downward revisions to FY’14 and FY’15 estimates. Our channel checks with Ambarella’s largest customer Chicony (TSEC: 2385), checks within AMBA’s supply chain, and conversations with various analysts indicate that AMBA’s fastest growing business segment, selling SoCs to be embedded in GoPro wearable cameras, has significantly weakened.
Based on conversations with the sell-side, current Street estimates for 20% QoQ revenue growth in FQ3’14 are based on extrapolation of FQ3’13 results; FQ3’13 was a boom time for AMBA on the back of a successful GoPro Hero3 product launch. Revenue from GoPro wearable camera SoCs have grown from 4% to 42% of AMBA’s consolidated sales in the year spanning FQ1’13 to FQ1’14. Our research, however, indicates that growth in Hero3 sales is currently dwindling and that a GoPro Hero3 refresh cycle will not take place in 2H’2013. While we do expect AMBA’s non-GoPro revenue to grow, it is unlikely to provide the kind of growth needed to offset the potential revenue shortfall from the GoPro-related business. Against the backdrop of Ambarella Inc (NASDAQ:AMBA)’s non-GoPro revenue having grown between -25% and +19% QoQ (and actually declining sequentially in three out of the four quarters), current Street estimates appear unachievable.
While Ambarella Inc (NASDAQ:AMBA) is well positioned in several growing markets, and we like its business for the long term, it has a customer concentration issue. Once a top- or bottom-line miss occurs, fears surrounding the opacity of its end markets, its high customer concentration and the elevated risk of end product cycle delay are likely to reemerge, with the company’s multiple contracting toward levels last seen at its 2012 IPO, or 10x EPS.
AMBA currently trades at LTM and forward P/E multiples of 22x and 14x. We believe the stock has an intrinsic worth of $11.40 per share, or 12x our FY15 EPS estimate, indicating 25% downside from current levels.