Morgan Stanley Upgrades Ambarella, Sees 30% Upside

Morgan Stanley’s Joseph Moore upgraded the rating on Ambarella Inc AMBA from Equal-weight to Overweight, with a price target of $55.

Upside Potential

Moore expects growth to persist across the company’s drones, wearables, consumer surveillance and autos segments, with the sports and pro surveillance businesses witnessing a rebound.

Moore also expressed increased confidence in Ambarella’s numbers, especially the new computer vision applications, which are in turn expected to drive P/E expansion, driving 30 percent upside.

“We have consistently believed that Ambarella has maintained leadership in video processing for high-end cameras, but have remained on the sidelines until now as we thought that the multiple had climbed too high given customer concentration,” the analyst stated.

Three Key Drivers

Given the 65 percent decline in the stock, from its highs, and with business trends bottoming out, Moore explained that there were three factors underpinning the bullish stance.

Firstly, the recent headwinds appear to have bottomed, and the analyst expects them to turn into tailwinds by 2H16.

“China surveillance customer checks have been encouraging, and we assume no additional revenues from existing GoPro Inc GPRO products until the 2h refresh,” Moore mentioned.

In addition, some of Ambarella’s core growth segments, including drones, autos, consumer surveillance cameras and wearables are expected to continue to drive solid growth.

Moore also expects the new computer vision chip, slated to launch in 2016, would not only “change the game,” but also add strategic value and drive stock performance.