Did Investors Expect Too Much From Ambarella's Q2 Results?

Ambarella Inc AMBA posted positive Q2 FY 2016 results, but investors aren't buying.

The stock closed down 6.3 percent Tuesday. Ambarella then reported a Q2 EPS of $0.88 versus the Street estimate of $0.81, and sales of $84.2 million versus $81.73 million. Shares initially dropped more than 2 percent in after-hours trading. As of 4:58 p.m. ET, shares of Ambarella were down roughly 1 percent.

"It's kind of what happened to Apple," Sean Udall, CIO of Quantum Trading Strategies and author of The TechStrat Report, told Benzinga. "The analysts get to a point where they raise and raise. They eventually get to a point where even if a company produces a really good report, the analysts are above it."

Udall thinks the guide (which is expected to be announced during Ambarella's earnings call at 5:00 p.m. ET) will be a key factor in how analysts react.

"The next quarter, that looks beatable, but analysts have raised [their expectations] quite a bit," said Udall. He added that this is the lowest EPS beat Ambarella has had in recent months.

"In the last three quarters it looks like they beat by anywhere from 12 to 19 cents, maybe even 23 cents. Maybe the bears will try to make something of the fact that the beat wasn't as big as it has been."

Udall said he had previously referred to Ambarella as a "bubble" stock. He said he closed his short position when Citron came out with a research report.

"The stock isn't cheap enough for me to be that interested," he added. "It's kind of in no-man's land. At the same time, it hasn't quite dropped to a valuation level where I can see it's a screaming buy, especially relative to so many names that have been crushed."

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'Huge Catalyst'

Udall said Ambarella is "obviously" going to "try to win a key supplier spot for GoPro when GoPro starts producing their drones next year."

"But we don't know exactly what quarter that GoPro is going to start drone production and/or selling drones," he said. "That's going to be a huge catalyst assuming Ambarella wins the slot, which they likely will."

Udall said that if GoPro Inc GPRO starts shipping drones in the early part of 2016, that could help Ambarella. If GoPro holds off until later in the year, Ambarella might feel some investor pressure.

Anticipated Punishment

Global Equities Research analyst Trip Chowdhry said that he expects Ambarella to face the same investor punishment endured by most other tech stocks.

"I think the markets are going to punish every stock," Chowdhry told Benzinga. "Right now the sentiment is 'not good enough.'"

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.