Name That Trade – $AMBA: From Zero to Hero

by Dan June 2, 2015 2:04 pm • Commentary

Shortly after NXPI’s takeover offer for Freescale I took a look at Ambarella (AMBA), the chip supplier to GoPro (GPRO) (read here), and concluded:

The stock is not cheap, and its future for the time being is very much attached to one company (GPRO) who is about to face a whole lot of competition from lower priced providers like Xiaomi who may have much better success in their home country of China. That being said, some analysts think that a lower end Xiaiomi wearable camera could benefit AMBA by dramatically increases the size of its addressable market.


I see no reason to step in front of this stock prior to tonight’s report, but if the stock were to be hit hard after a disappointing report the stock could be a scoop, or a defined risk view with options could be a way to play if you believe the stock could be a take-over candidate. I obviously have no knowledge of this, but yesterday’s deal in the semi space, and then HPQ’s purchase of Aruba (ARUN) for $2.7 billion suggest that the predators are prowling for growth. AMBA’s market cap below $2 billion makes it an easy target while MBLY’s $7 billion and GPRO’s $5.3 billion make it much harder when factoring in potential premiums.

The stock has risen 50% since, from $61 to $91, just yesterday making new all time highs, and now up 80% on the year, and up 500% over the last two years:

AMBA 2yr chart from Bloomberg
AMBA 2yr chart from Bloomberg

Event:  AMBA reports its fiscal Q1 results tonight after the close. The options market is implying about a 7% one day move.  With the stock at $91, the June 5th weekly 91 straddle (the call premium plus the put premium) is offered at about $7, if you bought that you would need a move above $98, or below $84 by Friday’s close to make money. The average move over the last 4 qtrs has been only 3.25%, while the 8 qtr avg is about 4.5%.

Since I last wrote on the AMBA there has been close to $50 billion in semiconductor deals (AVGO for BRCM and INTC for ALTR) and AMBA has benefited from its size, positioning in a fast growing segment, the bounce in GPRO shares and the general optimistic sentiment towards growth with the S&P back at the all time highs.

MY VIEW: While I thought the stock was expensive back in early March it is more so now, trading 39x expected fiscal 2016 earnings growth of only 15% and 10x expected sales of $285 million, which should grow 31% year over year.  To put valuation in context, INTC paid nearly 9x ALTR’s sales, which was sort of eye-popping for a deal that size. Before a meaningful pullback I would not be long this stock for the hope of a take-over.

A beat and raise is likely to cause shorts (short interest about 25%) to trip over-themselves to cover above the prior highs ($96), while a miss and guide down sends the stock easily down 10%.  That being said, I suspect the stock is between the implied range ($84 to $98) on tomorrow’s open.

From a technical perspective, the breakout level from last month, down at $77, which also corresponds with the stock’s 50 day moving average seems like a logical spot to pull back to on a disappointment in the coming days/weeks (red line below) while there is NO overhead resistance above yesterday’s highs:

AMBA 1yr chart from Bloomberg
AMBA 1yr chart from Bloomberg

This one seems like an “adult swim” sort of set up, we will pass!