WestPark Capital reiterates buy on Ambarella ahead of Q2 earnings: Should you invest?

WestPark Capital today reiterated its buy rating and $85 price target on Ambarella Inc. (NASDAQ: AMBA), highlighting a potential upside of nearly 70% from the current trading price.

Analysts’ opinions

The firm remains optimistic about Ambarella’s near-term prospects, driven by a recovery in inventory levels and long-term growth opportunities in artificial intelligence (AI).

Analyst Kevin Garrigan of WestPark Capital highlighted that Ambarella's automotive and Internet of Things (IoT) segments are expected to be key revenue drivers in the upcoming Q2 2025 earnings report.

The company's ability to gain traction in the automotive sector, particularly through design wins, is viewed as a crucial element in its growth trajectory.

Rosenblatt Securities also maintains a positive outlook on Ambarella, reiterating its buy rating and $85 price target on August 23, 2024.

Rosenblatt expects a robust 14% quarter-over-quarter revenue growth in Q2 2025, aligned with the mid-point of the company's guidance and consistent with market consensus.

The firm believes this momentum will extend into the third fiscal quarter, projecting a 10% sequential increase, marking a significant return to year-over-year growth for the first time in two years.

Rosenblatt’s optimism is grounded in Ambarella’s success in securing new design wins across sectors such as surveillance, automotive, and next-generation AI products.

However, CFRA remains cautious, maintaining a hold rating while raising its price target to $60 from $50 as of August 15, 2024.

CFRA's conservative stance reflects concerns about Ambarella's ability to fully capitalize on its growth opportunities in the face of potential headwinds.

Although the firm acknowledges the strong focus on AI and automotive, which are expected to drive significant revenue growth, CFRA emphasizes the ongoing risks associated with Ambarella’s financial performance, particularly its non-GAAP net losses and the volatility in its stock price.

Q2 earnings preview

As Ambarella approaches its Q2 2025 earnings release, the market anticipates a GAAP loss of $0.87 per share on revenue of $62.10 million.

Analysts have adjusted their EPS guidance in the last 90 days, signalling a cautious but optimistic outlook on the company’s near-term performance.

Ambarella’s revenue has been declining for the past seven quarters, but the expected stabilization in Q2 2025 could indicate that the company is beginning to turn the corner.

Fundamentally, Ambarella’s business has been under pressure over the last few years, with sales collapsing since mid-2021.

The company has struggled with maintaining consistent growth, and its recent financial performance has been marred by significant losses.

In FY2024, Ambarella reported a GAAP loss of $169.4 million, equivalent to $4.25 per share, marking a record low.

Ambarella’s growth has been driven by its efforts to reposition itself within the rapidly evolving AI and automotive markets.

The company's N1 system-on-a-chip (SoC) continues to gain traction, and its transition to edge AI applications could boost its growth prospects significantly.

However, this growth is not without its challenges.

Ambarella faces potential headwinds from geopolitical tensions, particularly the risk of US government-imposed restrictions on semiconductor companies doing business with China, which could significantly impact Ambarella’s turnaround strategy.

Valuation remains a concern for investors. Ambarella trades at 8.5 times its sales, significantly higher than the median in the semiconductor sector, which stands at 3.16 times.

This premium valuation reflects the market's expectations for Ambarella to deliver on its growth promises, particularly in the AI and automotive sectors.

Now, let's see what the charts have to say about the stock’s price trajectory.

This technical analysis will provide insights into the stock’s recent performance, key support and resistance levels, and potential price movements leading up to and following the Q2 earnings report.

Long-term downtrend persists.

Ambarella’s stock has seen a significant decline since late 2021 when it was trading above $200.

This downtrend persists to this day as it continues making lower highs and lower lows on the long-term charts.

Earlier this month, it made a new 3-year low below $40.

Source: TradingView
For Ambarella to end this bearish phase, it will have to break above the bearish trendline (seen in the chart).

Hence, investors who like analysts at WestPark Capital and Rosenblatt Securities are bullish on the stock must wait to give a breakout above the trendline before initiating fresh long positions.

Traders who are bearish on the stock must also remain cautious as it has bounced back significantly since making a low below $40 earlier this month and is trading close to its 100-day moving average.

If the stock manages to trade above its 100-day moving average it will reinforce short-term bullish momentum.