Ambarella Inc ( AMBA ) stock has had a tough year. Before Thursday afternoon's earnings announcement, shares were down 25% in 2016 and 53% in the last year.
But things may finally be starting to look up for Ambarella shareholders, especially after the company crushed earnings expectations in the fiscal first quarter. AMBA is up more than 10% in early trading today.
The company, a supplier of chips that enable high-definition video recording, initially rose to prominence as a GoPro Inc ( GPRO ) supplier, but AM BA stock has been punished as its largest customer started having struggles of its own.
And while Ambarella's CEO still sees some "near term headwinds" from GoPro's weakness, the company's other business lines are doing well enough that some are even saying AMBA has finally " decoupled " from GPRO, meaning the two stocks will no longer trade in sympathy.
If true, that's undoubtedly a good thing for AMBA stock owners.
AMBA Stock: Beats and Buybacks Beget Bullishness
Let's get to the numbers: Adjusted earnings per share came in at 34 cents per share, on revenue of $57.2 million. Both figures surpassed consensus estimates , which called for EPS of 28 cents on revenue of $57 million.
The chipmaker also announced the authorization of a plan to buy back $75 million of AMBA stock over six months. That may not sound like a lot, but let's remind ourselves that Ambarella isn't Intel Corporation ( INTC ), which is worth roughly 100 Ambarellas.
In other words, the $75 million buyback over half a year represents 4.8% of Ambarella's $1.57 billion market capitalization. If Intel executed a similar buyback relative to its size, it would be about $7.15 billion, or $14.3 billion annualized. Currently INTC has authorized buybacks of up to $8.6 billion , although last year it only bought back $3 billion worth of its shares.
Back to Ambarella: The idea that it could be "decoupling" from GPRO would be a dream come true for AMBA stock owners, and is somewhat supported by the divergent revenue estimates for each company. Wall Street expects GoPro's revenue to fall 17.6% this fiscal year, but for Ambarella's to fall just 1.5%.
Admittedly, it's a little too romantic to think that AMBA will totally decouple from its largest customer. GoPro's revenue cratered in its first quarter, which ran through March, falling 49.5%. Ambarella's quarter didn't overlap entirely - it ended in April - but revenue was still down 19.5%. GoPro's woes are still largely Ambarella's.
However, two quotes from Ambarella CEO Fermi Wang are worth noting, and I think we can see from the price action today that markets aren't ignoring them :
"We are pleased with our execution during the first fiscal quarter of 2017, as we introduced our first 14nm IP camera SoC and continued to see strong design win momentum for our new 4K and HEVC SoC families across all market segments."
"… we remain confident of renewed revenue growth based on our technology leadership, product roadmap and the potential of our current and future markets."
Revenue growth. That's the ticket right there - that's the phrase that got investors going. It's also a horrible thing for people shorting AMBA stock - and there are quite a lot of them.
As of mid-May, over 10 million Ambarella shares were being shorted. With average trading volume around 1 million shares per day, it would take shorts about 10 trading days to buy back in and cover their position. No doubt, a short squeeze is a big part of today's rally as well.
Going forward, this could be a good inversion point for Ambarella, which remains a fundamentally strong company. Its current ratio, which measures liquidity and specifically the ability to pay back short-term obligations, sits at an absurd reading of 7.57. Ambarella could cover its short-term obligations several times over.
Also, long-term debt is virtually nonexistent, sitting at $2.8 million. Ambarella could be much more aggressive and leverage itself to magnify returns if it wants to take more risk, which is a nice luxury to have.
All things considered, I'm a fan of AMBA stock, which may have finally found its bottom.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at@divinebizkidor email him at firstname.lastname@example.org.
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