Name That Trade – $AMBA Sauce

by Dan August 3, 2015 12:52 pm • Commentary

It’s hard to find many tech stocks that have performed as admirably in 2015 as Ambarella (AMBA) has with 130% year to date gains.  The company makes video compression and image processing semiconductors that go into industrial products, but also consumer oriented cameras like GoPro’s (GPRO) Hero line.  Despite GPRO being a low single digit customer of AMBA, the two stocks have been intimately attached from a hype standpoint.  AMBA’s gains ytd are part hype, part growth at a reasonable price and in some part related to the record M&A that has taken place in the space since March (NXPI/FreeScale, INTC/ALTR & AVGO/BRCM).  My thoughts from early March, in which I offered a way to finance calls when the stock was $61:

Take Over Candidate? The NXPI/ Freescale merger agreed to the other day (read here) could serve as an impetus for semiconductor companies that are looking for growth outside of PCs and Smartphones to look farther afield into potential faster growth areas that would use embedded cameras in consumer electronics like GPRO devices, connected home devices, autos or other industrial uses.  AMBA’s $1.8 billion market cap makes the company an easy take-over target for a large semi-conductor company like Intel (INTC), Qualcomm (QCOM), or Texas Instruments (TXN).

From the early March breakout to new all time highs, the stock rallied 100%, before having a very quick 30% decline, and then making a new all time high a month later.

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

So now what? Was that the mother of all double tops?? I have no idea, but $130 on the upside is a sort of level to use as obvious technical resistance with the consolidation just below $100 as fairly recognizable technical support.  

For those looking to make defined risk directional bets, long premium strategies could be a bit challenged with 30 day at the money implied vol approaching the highest levels of the year, despite no identifiable catalyst until earnings expected in early September:

[caption id="attachment_55822" align="aligncenter" width="600"]from Bloomberg from Bloomberg[/caption]

My sense is that the stock is expensive, and that a takeover premium is IN the stock, and that the company’s $3.65 billion market cap, 11x expected fiscal 2016 sales, would make a deal tough for most, but not impossible (resulting in a $5 billion-ish deal.)  I would guess that TXN or QCOM would be the most likely large cap acquirers, but probably only from lower levels in the stock.

The quick 30% decline in late June caught options market makers off guard, and that is not likely to happen again in the near future.  With the stock at $115.50, the August 115 Straddle (the call premium plus the put premium) is offered at $11.50, implying about a 10% move in either direction between now and Aug 21st, if you bought that, and thus the implied move you would need a move above $126.50, or below $103.50 to make money.  While that range is very likely, its a bit rich for my blood without a convicted directional bias.