The 'Trough' In Video Processing Is Over. Ambarella Will Drive Revenue From Here, Analyst Says Ahead of Earnings

Rosenblatt analyst Kevin Cassidy sees Ambarella, Inc's AMBA July quarter as the trough due to a perfect storm of events hitting their business. He reiterated a Buy and $125 price target.

Lockdowns, IC kitting shortages, and Samsung, Austin foundry shorted $5 million of product, Cassidy noted. The underlying demand for video processing remains robust, particularly in computer vision. 

While the October quarter may have some of the same, though easing disruptions, he expects revenue to improve ~7% Q/Q. Cassidy was bullish on the January quarter as the headwinds die down and new product designs drive revenue growth.

Analyst Mike Genovese hosted a non-deal roadshow last week with Extreme Networks, Inc EXTR CEO Ed Meyercord and VP of Strategy and Investor Relations Stan Kovler. He found the discussion very bullish as Enterprise Networking demand remains strong. 

Despite macro concerns, Extreme's sales pipeline is up >20%, and opportunity conversion rates are vital, especially in Europe, he noted. According to the CEO, the European sales team continues to forecast robust numbers. 

Extreme says the disjointed Cloud strategies of Cisco Systems, Inc CSCO (Neutral rated) and Hewlett Packard Enterprise Co HPE (Not rated) are helping. 

Genovese said it is also worth noting that Cisco had its second-best order quarter ever in July 2022 and is forecasting solid FY23 growth, demonstrating the overall strength of the industry in which Extreme is gaining share.

The guidance for 10%-15% revenue growth in FY23 and 13%-17% in FY24 & FY25 is supported by current order trends and over $500 million in backlog exiting FY22. The backlog will be more than $700 million exiting FY23. 

The company forecasts gross margins to improve ~600bps over the next couple of years as the supply chain eases and the mix shifts to software. He thinks accomplishing >400bps would be very positive for the financial model. 

Extreme will likely generate $200 million -$250 million of FCF per year from FY23-FY25 versus ~$300 million in debt. He boosted his price target to $20 from $15 and reiterated Buy based on 13x his FY24 EPS forecast of $1.40.

Price Action: EXTR shares traded higher by 6.79% at $15.18 on the last check Monday.

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