by Rasool Cunningham
Philadelphia, PA (DYDD)
First off, I do not currently own any $AMBA shares, nor am I short the stock, nor do I have any options to buy or sell this stock.
Ambarella , Inc is a semiconductor chip manufacturer. They make a chip that process audio and video using just the one chip. This saves space and energy. Their chips also enable better HD video than their competitors. This allows cameras like GoPro to capture good HD video using a relatively small camera. With everything from police cams, to cars, to garden variety surveillance cameras needing to get better quality video, Ambarella , Inc has many potential customers and repeat customers. There’s no wonder $AMBA has been one of 2015’s hottest stocks. The heat from the run up in the stock, along with recent market turmoil (Greece! China!) leads some to wonder if it’s time to take some chips off the Ambarella table. To answer this question, let’s look at some $AMBA fundamentals, and then look at the stock charts.
When you look at $AMBA’s fundies you can’t help but be impressed. Gross margin 64.2%, Operating margin 26.7%, ROE 31%, ROA 26%, earnings per share this year 84.7%, sales quarter over quarter 73.6%, and earnings per share quarter over quarter 229%! The problem with these numbers are: we don’t know how much of them are due to Ambarella’s great products, or easy money (QE). I say that because QE pulls demand from the future into the present. When you look at $AMBA’s fundies the future numbers don’t look nearly as well as past / present numbers. Earning per share (EPS) for the next five years are projected to come in at 20%. EPS projections for next year are at 18.5%. Begs the question: has all or most of $AMBA’s product demand been pulled from the future into the present and past? I don’t know, but one has to ask and wonder.
All of $AMBA’s fundies aren’t great. One that jumps out at me is the P/E ratio which stands at 51.9! Forward P/E is only 27.68. This means that while $AMBA’s earnings may not fall off a cliff, what people are willing to pay for those earnings could fall a lot. Another red flag is the recent insider selling. People sell for too many reasons for insider selling to carry too much weight in buy and sell decisions, but they should always be noted because: the people who know the company best are the insiders. Over the past twelve months there have been four insider buys and eighty-three sells. I don’t like that. Over the past three months there have been no buys and twelve sells. Again, I do not like that. While it can’t hold a lot of weight, it is a red flag and shouldn’t be ignored.
Last fundie red flag is the PEG ratio, or Price to Earnings To growth ratio. A broad rule of thumb is a PEG ratio of 1 or under means a stock may be undervalued. Above one, says a stock may be over valued. $AMBA’s PEG ratio is 2.6! PEG ratios vary from industry to industry, sector to sector; you have to look at the whole sector to discern whether a stock’s PEG ratio is high, or just normal for its sector. Out of forty-three stocks in its sector, only nine have a PEG ratio over 2.0. This says that $AMBA’s is high. This means it looks like $AMBA’s earnings growth, or price to earnings multiple expansion is at or near a peak. Ambarella just did a small acquisition last week which could boost earnings, but as of right now it doesn’t look great on future earnings.
Now the charts.
Ambarella is up 99.5% year to date. That’s not a typo, that’s a crazy gain for a company this large. Here’s how it looks on the daily chart:
An almost 100% move in the fist six months of the year is enough to make anyone feel like taking some chips off the table (do you see what I keep doing here? Chips? Chip maker? Never mind.) But the technicals aren’t screaming sell at the moment. The time to sell was on June 19th when the stock went down a little over 6%. If you missed that signal, on June 22 the stock opened for trading down 5%, and added another 16% to the drop by the end of the day! Wow, that’s brutal price action. What was even more brutal was volume on which this price action happened! Nine million shares traded on June 19, and twenty-five million shares traded on June 22! To put this into perspective the stock has an average trading volume of 2.9 million shares! All these exclamation marks are warranted. These were monster sell days. So strong that all the selling may be done for now. I drew a Fibonacci retracement on the weekly chart, and transferred it onto the daily chart, to give us an idea if there may be more selling to come. Here’s how it looks on the daily chart:
This makes things a lot more simpler. A close below 96.08 would signal a sell for me. (again, I do not currently own any $AMBA shares, nor am I short the stock.) I didn’t go directly to the charts and say this, because I think most chart signals are backed up by fundamentals. $AMBA’s current fundies suggest that new selling would be backed up by fundamentals. I have a rule where I sell any stock that drops 5% – 6%, so I would have been out of this by now. But, Under normal circumstances (Greece! China!) I wouldn’t be surprised if this stock went higher from here. Here’s where I would sell if price went higher:
I drew a resistance Fib from the bottom, or close of June 22 to the top, or open of June 19. If price went higher from here I would move my stop above every fib level price got above. The Greek crisis makes this a different time for analyzing stocks. We could see indiscriminate selling as stock holders sell to front run anyone else who may need to sell. At a time like this you may not be able to wait for a close without getting hosed, so, selling on a close below $96.08 isn’t practical at times of stress. In this case, any price trade below the June 22 low of $93.06 would signal a sell. This isn’t financial advice, just a run down of what I think about $AMBA and how I would probably trade it. I hope this is helpful, if it is helpful thank @Kem312 for asking me to look at this stock.. Thanks for reading, and good luck this week traders!