Citron Research released a new report on Ambarella Inc (NASDAQ: AMBA) that reiterated the firm’s extremely bearish outlook for the chip maker. In the report, Citron specifically calls out Jim Cramer’s bullish thesis for Ambarella as “ridiculousness,” and then explains how the stock’s current share price and the market’s high expectations for Ambarella are “detached from reality.”
The Bullish Argument
Cramer believes that Ambarella’s biggest growth avenue is not GoPro Inc (NASDAQ: GPRO) action cameras, but rather the rapidly-expanding drone market. “People are underestimating drones. Ambarella is the brains behind drones,” Cramer said on CNBC back in June.
In May, Dougherty & Co analyst Charles Anderson discussed the potential of the drone market. Chinese quadcopter drone maker DJI has projected sales of $1 billion in 2015. Anderson believes that the addressable drone market will swell to $1.9 billion in 2016 and sees a massive growth opportunity for GoPro and Ambarella.
Citron believes Cramer’s views on Ambarella’s chips as “the brains behind drones” is factually wrong. “It would be as foolish as saying the camera is the brains that controls the iPhone,” Citron wrote.
Citron argues that the real “brains” behind drones are companies developing the 3D geometry, image processing and navigations solutions for drones. Citron names Intel Corporation (NASDAQ: INTC), QUALCOMM, Inc. (NASDAQ: QCOM) and NVIDIA Corporation (NASDAQ: NVDA) as the true developers of the brains behind drones.
The firm does make a couple concessions. Ambarella is worthy of praise for the way its management has executed the company’s business strategy up to this point, it said. Citron also concedes that Ambarella has done a “fine job” in developing video solutions for GoPro and the first generation of quad copters. However, at $117 per share, Citron believes the stock is grossly overvalued.
“If the industry standard for semi companies is 2.5x revenue, but Citron will be overly generous and afford Ambarella 5x revenue...then the market cap is $2 billion...which pegs the stock at $66,” it added.
Long-term investors aren't paying any attention to the alleged dangers. Ambarella’s stock has skyrocketed by 312.8 percent in the past year.
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