Ambarella's Growth Fails To Impress, Analyst Sees 'Rough Road' Ahead

Summit Redstone downgraded Ambarella Inc AMBA to Hold from Buy as it sees more downside risks to revenue and earnings due to strengthening competition.

Despite reporting better-than-expected results for the fourth quarter, Ambarella expects first quarter revenues at $62.5-$64.5 million, which was weaker than expected.

For CY2017, Ambarella guided annual revenues to be in the range of -3 percent to +3 percent year-over-year ($300-$319 million), which was well below street estimate of $347 million.

Analyst Jagadish Iyer noted the company’s growth has been blunted for the second year in a row, as his checks show that the company now deals with losing a socket at its key customer GoPro Inc GPRO to “socionext.”

“Sales to GoPro are expected to decline significantly this year (~$60m) because of this socket loss and should contribute < 5% of revenues this year compared to 24% of total revenues last year (CY16),” Iyer wrote in a note.

Related Link: Ambarella's Hyper-Seasonality Continues To Be A Concern

Moreover, Ambarella’s other revenue verticals such as drones and automotive aren't big enough to offset the potential near-term revenue loss to GoPro.

As such, Iyer sees downside risk to revenue and earnings as his checks indicate the competition is likely to expand its footprint in markets where Ambarella is participating. This implies challenges for the company’s goal to grow revenue at mid-teens at least over the next two years.

Iyer, who cut his price target to $50 from $76, expects a modest 2 percent revenue growth this year and an 8 percent growth next year which is “uninspiring in our opinion.”

“We believe it is going to be a tall order for the company to get back on a growth path despite the company trying to diversify its revenue base,” Iyer added.

At last check, shares of Ambarella fell 5.16 percent to $55.91.