Ambarella stock tanked on Monday after Citron Research issued a short thesis on what it called the company’ “ridiculousness,” but shares are rallying today following bullish reports from buy-side analysts. Shares of the GoPro supplier climbed as much as much as 7.86% to $101.78 per share today after plunging 20% on Monday.
GoPro stock was also affected by the reports from Citron and the buy-side. After diving on Monday, GoPro climbed as much as 4.42% to $57.35 per share during regular trading hours today.
What Citron said about Ambarella
Within the next 12 months, Citron expects Ambarella shares to fall to about $60, and within the six months after that, the firm expects the stock to decline to $40 a share. The research firm compared the camera chip maker to Uber, which it called “the valuation wunderkind of the sharing economy” and possibly “the best growth story of the 21st century.”
However, Ambarella’s growth has dwarfed that of Uber even though at its initial public offering, it had to price its shares 40% lower than its previously marketed range. At the end of the IPO, the GoPro supplier had an enterprise value of $60 million, but in less than three years, the value has grown more than 60 times to more than $3.7 billion.
Problems with GoPro too
Citron’s big problem with Ambarella is that it’s a niche player as it makes chips for action cameras like those made by GoPro and other cameras like those used for drones, infrastructure and the automotive market. The firm likens its position on Ambarella as a niche player to its previous calls on 3D printing stocks. Earlier this year, Citron also suggested that GoPro will end up being this year’s 3D Systems.
It doesn’t believe the chip maker will see a very large addressable market because it doesn’t think action cameras will see significant growth. Citron also thinks Ambarella is coming to the end of its “technological edge,” as the last innovation was the 14-nanometer 4K60 chip unveiled in October.
Buy-side sees opportunities in Ambarella’s slide
Whenever a research firm or investor comes out with such a bearish thesis on a company, there are always going to be bulls opposing that thesis. In this case, FBN Securities analyst Shebly Seyrafi and Canaccord Genuity analysts Matthew Ramsay and Steven Lee came forward as bulls. Morgan Stanley analysts Joseph Moore, Craig Hettenbach and Alvin Lim were more moderate in their report on Ambarella, although they did not focus on the Citron thesis in their report.
The Canaccord Genuity team disagrees with Citron’s view that Ambarella’s innovation has peaked, saying that the chip maker’s “technology differentiation” has resulted in share gains and “socket stickiness.” Ramsay and Lee said Ambarella’s tech is different than that of other companies because it delivers higher quality video and efficiency in power and compression.
Upside expected for Ambarella
They see further upside for the chip maker in emerging markets, which have been growing rapidly. For example, Ambarella expects drones to surpass 10% of overall revenue this year and eventually end up with a total addressable market that’s similar to that of the action camera market.
They also expect upside to their estimates as DJI and other drone makers ramp up operations and Comcast and AT&T launch home security camera systems. They have a Buy rating and $115 per share price target on Ambarella and call Monday’s selloff an “overreaction” which they said “finally” offered the pullback in share price they had been hoping for.
Several drivers of growth
Seyrafi echoed the Canaccord Genuity team’s comments about buying on the pullback, reiterating his Outperform rating and $110 per share price target. He sees multiple drivers for growth at Ambarella, including not only GoPro and Xiaomi for their action cameras, but also the home IP security market, automotive cameras for dash-cams and 360-degree viewing, drones, analytics, and self-driving cars.
The analyst actually went so far as to suggest that a deal between Ambarella and Qualcomm could make sense “at some point.” He noted that Qualcomm acquired Atheros, a WLAN company, in 2011 and that Ambarella doesn’t do WLAN.
Upside in Ambarella’s margin
In addition to the expected upside on the metrics listed by Canaccord Genuity, Seyrafi also expects upside in the chip maker’s gross margins. Ambarella’s long term target is between 59% and 62%, although it was 64.8% in the April quarter and has been higher than that long term target for the last seven quarters.
He also thinks the higher margin will be sustainable as drones and automotive cameras—two higher gross margin segments—continue to grow.
Ambarella and Qualcomm
Interestingly, the Morgan Stanley team cited an announcement regarding Ambarella’s loss of a major deal to Qualcomm as the big factor in Ambarella’s slide this week. Indeed it could have had some impact, particularly as the news came around the same time as Citron’s damaging short thesis report.
Moore and team’s comments about Qualcomm’s winning of the contract over Ambarella are particularly interesting when added to Seyrafi’s suggestion that there could be a tie-up of the two companies at some point. Qualcomm won a deal for a major component in a new sports camera called the 4GEE, which is being made by London-based mobile carrier EE. The camera is meant to compete with GoPro’s camera.
The Morgan Stanley team thinks any concerns about this lost deal are overdone because Qualcomm doesn’t have a “dedicated camera solution.”
