Can Ambarella Stock Rise More after Upbeat Earnings?

Ambarella (AMBA) stock rose sharply in extended trading on Monday. The company reported upbeat third-quarter earnings after the closing bell.

Ambarella’s stock price movement

The semiconductor stock was also more than 2% higher in the pre-market session today at 8:17 AM EST. Ambarella reported impressive earnings results for the third quarter of fiscal 2020, which ended in October. The company’s earnings and revenues crushed the estimates.

We noted that Ambarella stock also gained momentum ahead of its third-quarter earnings results. The stock closed 6.05% higher and ended the trading day at $58.03. The stock gains were due to hopes about the US-China trade deal, according to a CNBC report. On Monday, China’s Commerce Ministry said that the two economies are trying to reach phase one of the trade deal.

At Monday’s closing price, Ambarella has a market capitalization of around $1.92 billion. The stock is 13.6% lower than the 52-week high of $67.15 and 80% higher than the 52-week low of $32.23. The stock has also gained around 66% on a YTD (year-to-date) basis. In comparison, the S&P 500 has gained 25%.

Q3 earnings and revenues

Ambarella posted an adjusted EPS of $0.32 in the third quarter. The numbers beat analysts’ expectations of $0.21 per share. The third-quarter earnings also rose more than 52% YoY (year-over-year) due to the higher top line. We noted that the company witnessed its first earnings growth YoY after suffering from declining earnings in the previous eight quarters. However, the gross margins fell by 280 basis points to 58.1% during the quarter.

Ambarella’s revenues reached $67.9 million in the third quarter. We noted that the company’s revenues grew from the previous quarter and from the year-ago quarter. The revenues beat the company’s guided range of $63 million–$67 million announced during the second quarter. In the third quarter, the revenues beat analysts’ estimates of $65 million and rose 19% YoY. Notably, the company’s revenue growth came after eight consecutive YoY revenue declines.

Growth drivers

In the third-quarter earnings call, Ambarella stated that it’s progressing despite trade war uncertainties. Notably, the company is highly exposed to China. Two of the company’s key customers are located in China.

Ambarella wants to become a prominent AI and CV (computer vision) company. The company is also witnessing high demand from automotive and large security camera customers. The semiconductor company generated revenues from all of the CV products. Notably, Ambarella shipped many pre-production product parts and development systems in the quarter, which reached over 50 customers.

Ambarella’s outlook

During the third quarter, the company expects the gross margin to be 56.5%–58.5%. Ambarella also expects operating expenses of $29.5 million–$31.5 million. During the third quarter, the company expected the fourth-quarter revenues to grow to $55 million–$59 million. We noted that Ambarella expected improved revenues in the second half of fiscal 2020, compared to the first half, during the second quarter.

For the fourth quarter, analysts expect Ambarella’s revenues to grow 11.9% YoY to $57.2 billion. Analysts expect the company’s revenues to increase 0.4% in fiscal 2020 ending in January. The sales will likely improve significantly by around 4.65% in fiscal 2021. In comparison, the company’s revenues fell 22.9% in fiscal 2019.

Wall Street analysts forecast a decline of 30.7% YoY to $0.10 in the fourth quarter. Analysts also foresee a drop of 16.5% in fiscal 2020 compared to a fall of 64.5% in fiscal 2019. For fiscal 2021, analysts expect the rate of decline to improve. They expect the earnings to fall 3.97% in fiscal 2021.

Analysts’ recommendations and target price

Among the 12 analysts covering Ambarella stock, four recommend a “buy” rating on the stock—down from five the previous month. About six analysts have a “hold” recommendation on the stock—unchanged from the previous month. Only two analysts have a “sell” recommendation on the stock—unchanged from last month.

After the third-quarter results, many analysts raised their target price on the stock. Analysts including Dougherty, Craig-Hallum, and Deutsche Bank raised their target prices after the third quarter. Dougherty raised the target price to $61. Craig-Hallum also lifted the target price to $70 from $62. Deutsche Bank increased the target price to $55 from $50.

Currently, analysts have a 12-month target price of $60.38 on Ambarella stock. On Monday, the stock was trading at a discount of 3.9% to analysts’ 12-month target price. The median target price was $60.50 on the same date.

Ambarella’s stock returns

Ambarella stock closed 3.8%, 2.5%, and 8.3% above its 20, 50, and 100-day moving averages of $55.88, $56.64, and $53.56, respectively. Since the price is above the moving average, the stock has an upward trend.

Ambarella’s 14-day RSI (relative strength index) score is 57.92. The RSI shows that the stock is currently in the “hold” area. However, the stock is near the “overbought” category. Notably, an RSI level above 70 means that the stock is overbought. Ambarella’s upper, middle, and lower Bollinger Bands are $59.63, $55.76, and $51.89, respectively. The stock closed near its upper Bollinger Band on Monday, which indicates that the stock is overbought.

We think that the stock picked up momentum after its third-quarter results. The technical indicators also show that the stock has the strength to rally in the near term. Trade deal optimism should also boost the share price.