Do you still have shares of Ambarella Inc.AMBA in your portfolio? If yes, then this is the best time to dump the stock as chances of favorable returns in the near term are slim.
In fact, the stock has gained just 0.9% so far this year, underperforming the Zacks categorized Electronics-Semiconductors industry, which witnessed a gain of 16.4%. Let's delve deeper and try to find out what is taking this Zacks Rank #5 (Strong Sell) company down.
What's Pulling Ambarella's Shares Down?
Ambarella manufactures video compression and image processing technology that is used in a variety of small cameras, computers and mobile phones. The company has a diversified product line, offering devices that fit into five main markets: Security Cameras, Automotive Cameras, Sports & Flying Cameras, Wearable Cameras, and Broadcast Infrastructure Systems.
Of these categories, Ambarella is most notable for its sports camera technology. The company produces a video processing chip which is a main component in the popular brand of GoPro GPRO action cameras. GoPro produces water resistant, wearable, high-definition cameras that produce unique first-person videos and have been taking the internet by storm for the last few years.
However, Ambarella, during its last quarterly results, warned about a possible decline in revenues from GoPro in fiscal 2018. This is because, per the the company, GoPro is using a chip from a competitor in its new camera, which will hurt shipment volumes, resulting in revenue decline for Ambarella in the second half of the fiscal. Moreover, escalating operating expenses are likely to hurt bottom-line growth.
It should be noted that, in fiscal 2017, Ambarella's earnings declined 11.8% over fiscal 2016 to $2.92 per share. Further, revenues decreased almost 2% to $310.3 million. GoPro's total contribution declined from approximately 30% of revenues in fiscal 2016 to 24% in fiscal 2017.
Downward Estimate Revision
Estimates for first quarter and fiscal 2018 have moved south in the past 30 days. The company's first-quarter fiscal earnings estimates moved down by 30 cents to 3 cents per share. Similarly for fiscal 2018, earnings estimates moved down by $1.28 to 80 cents per share. Given its weak guidance, the stock is likely to underperform in the quarters ahead.
Ambarella, Inc. Price, Consensus and EPS Surprise
In our opinion, although Ambarella was once one of the hottest stocks in the semiconductor industry, it has become a bit too volatile and risky for investors right now. Additionally, the stock has a VGM Style Score of 'C'.
Notably, the Zacks VGM Style Score rates each stock on their combined weighted styles, helping to identify those with the most attractive value, best growth, and most promising momentum, across the board. Stocks with a VGM Style Score of 'A' or 'B' and a Zacks Rank of #1 (Strong Buy) or #2 (Buy), have even better returns, on average, than the individual components, as it considers three times as many items that are correlated to future stocks returns.
Looking at the aforementioned factors, we recommend investors to stay away from investing in Ambarella until its Zacks Rank, VGM score and estimates improve.
Stock to Consider
A couple of better-ranked stocks in the technology sector are Seagate Technology plc STX and Western Digital WDC , both sporting a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .
Seagate and Western Digital have long-term expected earnings per share growth rate of 8.2% and 12.1%, respectively.
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