Guidance Cut Could Sent Ambarella's Downward Spiral Lower

Chardan Capital’s Marc Estigarribia maintained a Neutral rating for Ambarella Inc AMBA, while reducing the price target from $90 to $50.

Ambarella has the potential to return to a healthy, above-market-average CAGR in sales, earnings and FCF, driven by the strength of its video chip technology, analyst Marc Estigarribia said. He added, however, that the absence of any material catalyst until at least FY17 is likely to force the company to lower its guidance.

Near-Term Concerns

The lack of visibility into the company’s turnaround timetable from its current downward run rate is an area of concern. Estigarribia added, “This near-term uncertainty leads to our multiples valuation downgrade and lower 12-month target price.”

Ambarella’s near-term growth is expected to be driven by its Drone segment, while the Auto [OEM] business is likely to be the long-term growth driver. There is no clarity into a turnaround from Ambarella’s major customer GoPro Inc GPRO, due to excess inventory glut, which was originally expected to last around at least through April.

Ambarella’s top line is expected to decline 5.8 percent y/y to $298 million in FY2017, and increase 16.1 percent y/y to $346 million in FY18.