Ambarella Bull Flips Position Month After Upgrade: Here's What Concerns Him

Dougherty's Charles Anderson has downgraded Ambarella Inc (NASDAQ: AMBA) to Neutral, only a month after it upgraded the stock to Buy.

"We're no fan of flipping ratings one month after making a change, but we feel it is prudent to go back to a Neutral rating on Ambarella at this time. The bottom line is that we are unable to make a strong argument that this is a good entry point. It seems more like fair value," Anderson wrote in a note to clients.

Related Link: Morgan Stanley Sees Minimal GoPro Risk To Ambarella

Santa Clara, California-based Ambarella, which makes HD video processing chips, reported better-than-expected earnings of 64 cents a share for the fourth quarter. However, its first quarter outlook for earnings and sales missed Street view. The company guided first quarter of $55 million–$57 million, below consensus estimate of $63 million. On the weak guidance, shares of Ambarella fell as much as 10 percent.

A weak pre-announcement from its key customer GoPro Inc (NASDAQ: GPRO) is weighing on the Ambarella's prospects. Ambarella provided cautious management commentary around near-term GoPro reordering levels and visibility in China for IP Security demand.

The company management opted not to give FY17 guidance, but gave overall cautious commentary around GoPro (single-digit percentage of revenue until a new product launches "with our chip") and IP Security (China demand trends are challenging to predict).

"While we took GoPro revenue to zero in April, it sounds like we under-estimated how much inventory still needs to be burned off in the channel going forward. We said when we upgraded that we hoped we had seen the last cut. It turns out we hadn't," Anderson noted.