Ambarella Inc. AMBA is set to report third-quarter fiscal 2016 results on Dec 3. Last quarter, the company posted a negative earnings surprise of 1.37%. Nonetheless, it should be noted that the company has surpassed the Zacks Consensus Estimate in three out of the trailing four quarters with an average positive surprise of 22.13%.
Let's see how things are shaping up for this announcement.
Factors to Consider
Ambarella develops chips for the high-definition (HD) video capture market and is currently witnessing increasing demand for its products, as can be seen from more than 79% revenue growth in the second quarter.
Ambarella’s products are used in a wide variety of HD and ultra HD cameras, especially security IP-cameras (the main business driver), sports cameras, wearable cameras, flying cameras, and vehicle video camera recorders. The company’s compression chips are also used in broadcasting television programs globally.
Furthermore, since Ambarella started working with GoPro, its top line increased significantly. The chip-maker’s technology is used in GoPro’s first person point-of-view cameras, allowing users to take videos from snowboards, surfboards, or car dashboards. The company has also partnered with Google for its “Helpouts” services. These services help users with a range of jobs from fixing their cars to taking art lessons, through a video camera connected to Wi-Fi or Bluetooth network.
Further, Ambarella has been trying to expand its reach in other markets too, such as IP security, automotive, and drones/flying cameras. In July, the company acquired VisLab S.r.l. in an all-cash deal worth $30 million. By integrating VisLab’s computer vision and intelligent control systems with its video processing technology, Ambarella will be able to develop high performance products and target its core markets — automotive, IP security, wearable and flying cameras.
Also, the VisLab takeover will boost Ambarella’s product portfolio and help it to compete with Israel-based Mobileye N.V. MBLY, currently the world’s leading provider of driver assistance technology.
We believe that these collaborations will drive the company’s results in the to-be-reported quarter and beyond.
However, the company has been criticized for the lack of innovation by short-seller, Citron Research. According to Citron, the company faces severe commoditization risks and hence, stiff competition, going ahead. These factors may negatively impact Ambarella’s third-quarter profitability, in our view.
Earnings Whispers
Our proven model does not conclusively show that Ambarella will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.
Zacks ESP: ESP for Ambarella is 0.00%. This is because the Most Accurate estimate stands at earnings per share of 71 cents, in line with the Zacks Consensus Estimate.
Zacks Rank: Ambarella’s Zacks Rank #3 when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are a couple of companies which you may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Costco Wholesale Corporation COST, with an Earnings ESP of +2.59% and a Zacks Rank #3.
Restoration Hardware Holdings Inc. RH, with an Earnings ESP of +1.59% and a Zacks Rank #3.
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