Shares of Ambarella (NASDAQ: AMBA) are plunging more than 10% in the wake of the Q2 earnings report and beg the question, is this a buy-the-dip opportunity? If the past institutional activity can be used as a guide, the answer to that question is yes. The institutions have been net buyers of the stock for at least the last 13 consecutive quarters and ramped up their purchases in Q2 and Q3 of this year. So far, the Q2 and Q3 figures have net buying at $0.357 billion which is worth 11% of the market cap with shares trading at the pre-earnings release price of $84. Considering the number of shares purchased at prices both lower and higher than this over the past 6 months, the 10% discount will most likely be used by the institutions to add to their positions. Ambarella is, after all, a leader in video, computer vision, and AI and those are all high-demand areas of the microchip industry.
“Computer vision (“CV”) revenue increased significantly year-over-year in Q2 and our cumulative CV shipments now exceed 10 million SoCs, including more than 20% shipped into the automotive market,” said CEO Fermi Wang.
Ambarella Falls On Tepid Outlook
Ambarella had a good quarter and gave good guidance but there is a factor weighing on share prices that may keep the stock moving lower in the near term; the performance was in-line with expectations and the guidance is weak relative to the analyst's consensus figures. Aside from that, the company reported $80.88 million in revenue for a gain of 2.0% over last year. Last year, revenue grew 58% to the highest level since the day’s GoPro was a headline growth story so the gains are significant however small. The company says demand is strong in all areas with video and computer vision driving the business.
Moving on to the margin, the news is good with the GAAP and adjusted gross margins both widening versus last year. The adjusted gross margin expanded by 170 basis points to 64.5% which left earnings down on a YOY basis but a penny better than expected at $0.20. Earnings are down YOY due to the resumption of investment activities that were halted during the Occuli purchase process.
The guidance is what really got the market’s attention because the revenue and margin outlook is unfavorable to the share price. The company is expecting revenue in the range of $81 to $85 million which is sequential growth even at the low end but compares poorly to the consensus of $84.6 million. The margins are also expected to contract by 50 to 150 basis points which mean earnings will weaken as well.
The Analysts Still Like What They See In Ambarella
The Q2 results have the analyst lowering their price targets for Ambarella but they still like what they see in the company. The post-release action has spawned at least 6 analyst commentaries including 5 price target reductions and 1 downgrade. The downgrade is from Summit Insights which lowered to Hold from Buy but the consensus is still a Moderate Buy verging on Buy with a price target 50% above the current price action. The charts show a market near a bottom but there is a fair distance left for the stock to fall. Price action could shed another 10% or so before hitting truly firm support but it should trigger a strong response from the market when it does. Longer-term, assuming institutions keep buying the stock, it should move higher and back above the $100 level. 
