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GoPro Inc Supplier Ambarella Inc Up On Strong Earnings

Ambarella released its first quarter earnings report last night, and the results were better than expected, sending shares surging. Management even had a little something for GoPro as they said they expect the wearables market to go back up. It’s been a few quarters since the supplier of chips for wearable devices and cameras had something good to say about wearables, so this is particularly good for GoPro.

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Ambarella beats earnings estimates

Shares of Ambarella surged to as high as $47.55 during regular trading hours on Friday, but pulled back slightly. As of this writing, the stock is up 7.3% at $45.58 per share.

The company reported $57.2 million in revenue for its first fiscal quarter, representing a 16% decline quarter over quarter and just barely beating the consensus of $57 million. The result also was at the high end of management’s guide for $55 million to $57 million, and Deutsche Bank attribute the strong revenue result mostly to upside in Other revenues, which includes drones. Other revenues were 25% of total revenues.

IP Security revenues were 45% of revenues and about in line with the strength noted in Home Security, added DB analysts, who also pointed out that weaker China Professional revenues offset this strength. Ambarella’s gross margin came in at 64.6%, which beat the consensus of 61.3%. The strong margin beat was due to a favorable mix with more drones and less China Security product. It also drove the decisive earnings beat at 34 cents per share, against the consensus at 28 cents.

Forgiving on Ambarella’s weak guidance

The one weak area in the GoPro supplier’s April quarter results was guidance, and for most companies, a weak outlook has sent their shares plunging. However, it seems Wall Street was more forgiving for Ambarella because the outlook wasn’t overly soft and because the chip maker had a good excuse. Deutsche Bank analysts noted that the Japan earthquake damaged the company’s image factory.

They continue to rate the company at Hold, although they bumped up their price target for the company from $45 to $47 per share. They’re encouraged by management’s execution, but they add that there’s still uncertainty regarding recovery from the earthquake.

A lingering concern

Morgan Stanley analysts have been more constructive on Ambarella, and they have also been concerned about the fallout from the earthquake. They found the April quarter results as being particularly positive because the company outperformed despite the sensor shortage caused by the earthquake.

They continue to rate the chip maker’s stock at Overweight with a $55 per share price target and note that the image sensor shortage will continue into the third quarter. They see this as a “lingering concern,” but overall, they expect a strong rebound. They add that the main impact from the sensor shortage and repairs at the Japan factory will to push some revenues from the second and third quarters into the fourth quarter.

What Ambarella’s strong results mean for GoPro

Another area of uncertainty for Ambarella is whether GoPro, a key customer, will recover and if it does, the magnitude of that recovery. The company makes chips that are used in GoPro’s cameras, so many investors and analysts see the two companies’ fates as being intertwined, although there is much more to the company than chips for GoPro’s cameras. The April quarter results demonstrated that drones are turning out to be quite a lucrative market for the company.

However, investors shouldn’t give up on Ambarella’s wearables business yet. On last night’s earnings call, management had encouraging remarks to say about the market. Chief Financial Officer George Laplante noted that wearables remain challenging through the first half of this year, but in the second half, they expect the market “to return to somewhat normal levels.” GoPro is expected to release the HERO 5 camera later this year, so that should give Ambarella’s results a boost, although whether the boost will be a sustained one depends on whether the camera is successful and enables GoPro to return to growth.

Shares of GoPro surged in premarket trading this morning as Wall Street digested the comments, and the stock opened at $11 per share before pulling back slightly. As of this writing, the shares are up 0.65% at $10.79.

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