Ambarella Shares Down 10% This Week; Stifel Says Buy The Dip - Ambarella (NASDAQ:AMBA)

Ambarella Inc AMBA shares came under selling pressure this week, as the shares dipped about 10 percent by Thursday in the abbreviated week.

Stock Sell-Off A Buying Opportunity

After climbing to the highest level in the year-to-date period ahead of the Memorial Day holiday, the stock gap-opened lower on Tuesday and ended the session 7.4 percent lower on over three times its average volume. The weakness continued into Wednesday's session, as the stock lost an incremental 3 percent.

Source: YCharts

The negative reaction came ahead of its first quarter results, due to be announced next week (June 6). Analysts, on average, expect the company to report earnings of $0.36 per share, up from $0.34 per share earned a year ago. Revenues are expected to have grown an estimated 11.10 percent to $63.48 million.

Loss Of Customers Triggering Weakness

Amid the sell-off, Stifel said in a note that the weakness is due to the recent news of a new DJI drone and Nest camera that may not be based on Ambarella's SoCs. The firm recommended investors to use this pullback as an opportunity to own Ambarella shares as a play into the ComputerVision/AI market. This was the first time, DJI had not based its drone on Ambarella SoC, the firm noted.

Analyst Kevin Cassidy and John Donnelly expect DJI to introduce low cost, higher resolution video capture drones based on Ambarella's H22 SoC in the future. The analysts see autonomous drones as creating commercial use for drones.

While noting that Nest announced a new home surveillance camera that may not include Ambarella SoC, Stifel said Ambarella's focus is on ComputerVision, where video is converted to pertinent data in the camera.

"We believe Ambarella management is moving the company toward applications with higher competitive barriers and higher valued applications," the firm said.

Stifel expects product launches in the second half of the calendar year 2018 following the sampling of the ComputerVision chip in the third quarter of calendar year 2017.

Solid First Quarter 2018 Results Likely

Specifically, Stifel expects Ambarella to report solid first quarter fiscal year 2018 results, with revenues and earnings coming in line to the high end of the guidance.

Stifel maintains its fiscal year 2018 first-quarter revenue and non-GAAP earnings per share estimates of $63.5 million and $0.36 per share, in line with the Street estimates. For the second quarter, the firm is above-consensus at $74 million in revenues and $0.50 per share in non-GAAP earnings.

Near-Term Prospects Encouraging

In the near term, Stifel expects increasing revenue from the automotive segment in the first half of fiscal year 2018, with the firm expecting its contribution to increase to 15 percent of the fiscal year 2018 revenues from 10 percent in fiscal year 2017.

The firm believes increased dashboard camera adoption, especially by OEMs, would generate first half growth, while expecting the e-mirror revenue contribution to begin in the second half of the year.

"We believe management has set investor expectations for FY18 conservatively enough to account for 20%–30% y/y revenue growth in core security, drone and automotive markets offset by a decline in GoPro related sales," the firm said.

As such, Stifel has a Buy rating and a $65 price target on the shares of Ambarella.

At time of publication, shares of Ambarella had slipped 3 percent at $56.78.

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