Expect Ambarella To Pay Near-Term Costs For Long-Term Goals

Shares of Ambarella Inc AMBA tumbled nearly 10 percent Wednesday after the company's first-quarter earnings report was overshadowed by a poor guidance.

The results prompted Deutsche Bank's Ross Seymore (check out his track record) to maintain a Hold rating on Ambarella's stock with a price target lowered from $55 to $54, as the report contained a mix of good and bad.

The Good And Bad

Ambarella's first quarter was "solid" and the company succeeded in growing core revenue by 13 percent, which exceeded the analyst's own expectations of 9 percent growth.

Ambarella's fiscal 2018 guidance of flat overall revenue year-over-year, but non-GoPro Inc GPRO revenue up as much as 30 percent is encouraging, the analyst stated. Also, the company's commitment to deliver computer vision chips for the Security, Drone and Auto markets adds to a positive outlook.

While these investments in new categories bode well for the long-term story, computer vision isn't expected to be a meaningful contributor until calendar 2018 and 2019. Until these potential headwinds kick in, Ambarella's near-term story will be characterized by the ongoing volatility with GoPro and drones, elevated investments, and higher taxes.

Bottom line, the analyst's $54 price target is based on a CY18E P/E multiple of 19x which is in-line with Ambarella's high-growth peers and also factors in near-term volatility and concerns.

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