Editors Note:

This company's biggest customer is throwing in the towel. GoPro is getting out of the drone business and that is bad for Ambarella.


No New Bullish Plays


AMBA - Ambarella - ETF Profile

Ambarella, Inc. develops semiconductor processing solutions for video that enable high-definition (HD) video capture, sharing, and display worldwide. The company??s system-on-a-chip designs integrated HD video processing, image processing, audio processing, and system functions onto a single chip for delivering video and image quality, differentiated functionality, and low power consumption. Its solutions enable the creation of video content for wearable sports cameras, automotive aftermarket cameras, and professional and consumer Internet Protocol (IP) security cameras, as well as cameras incorporated into unmanned aerial vehicles in the camera market; and manage IP video traffic, broadcast encoding and transcoding, and IP video delivery applications in the infrastructure market. The company sells its solutions to original design manufacturers and original equipment manufacturers through its direct sales force and logistics providers. Ambarella, Inc. was founded in 2004 and is headquartered in Santa Clara, California. Company description from FinViz.com.

Ambarella was a big manufacturer in the action camera sector. Last week GoPro said it had cut prices significantly on the Hero line of cameras and the company announced it was exiting the drone business. This is especially bad for Ambarella since the drones had multiple cameras, some as many as a dozen. GoPro also indicated they were going to explore strategic alternatives including the sale of the company.

GoPro represents more than 20% of Ambarella's business. That means the dramatic reduction in GoPro products will mean an equal reduction in Ambarella sales.

Ambarella has been rapidly diversifying into other areas including security cameras and cameras for self driving vehicles. That will protect them in the long term but in the short term sales are going to stumble because of GoPro.

Earnings are March 1st.

Shares fell sharply on Jan 10th after the GoPro announcement that earnings would be significantly below expectations. Ambarella had posted a big earnings beat in Q3 of 75 cents compared to estimates for 66 cents. However, without reorders from GoPro in Q4, they could be facing lower guidance and a possible earnings miss when they report March 1st. Investors are selling the stock ahead of the potential lowered guidance, which could appear at any time.

There are no March options yet and May strikes are too expensive. I am using the February strike even though there are only 4 weeks left. It is only $1.36 OTM so we should be ok as long as the stock continues to decline.

Buy Feb $50 put, currently $1.85, initial stop loss $56.