Shares of GoPro (GPRO) chip supplier Ambarella (AMBA) dropped Thursday after Pacific Crest cut its price target on the shares to reflect slumping demand for the action camera brand, which the research firm argued has led to “massive,” ongoing inventory corrections.
RESETTING MODEL: Pacific Crest analyst Brad Erickson cut his price target on Ambarella to $53 from $62 this morning to reflect “massive” GoPro inventory corrections amid weaker demand for the action cameras. The analyst scrubbed his Ambarella model to account for the “full magnitude” of the past nine months of GoPro inventory adjustments, which Erickson noted appear to be continuing based on his April 24 checks. He estimates GoPro-derived revenue to fall 51% in Ambarella’s 2017 due to excess channel fill last year. All that said, while there could be “slight” near-term risk to Ambarella’s second quarter guidance — with the timing of GoPro builds being the key determinant — Erickson still sees the long-term risk/reward balance in Ambarella shares as favorable given that the name trades at just twelve times his 2018 estimates. Moreover, with 2017 revenue forecasts looking for a 1% dip, the analyst believes the market is “largely prepared” for a presumptive lowering of the company’s annual target. “Much” negativity is already priced in, Erickson added, and his checks with drone retailers indicate sell-through rates in line with expectations. The analyst reiterates an Overweight rating on Ambarella.
PRICE ACTION: Shares of Ambarella have declined 6.7% to $35.67 in afternoon trading, while GoPro has fallen 6.4% to $8.85.
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