Last week, short-selling firm Citron Research released a report on Ambarella Inc (NASDAQ:AMBA) that wasn’t exactly flattering to say the least. In it, the firm called Ambarella a “ridiculous” stock and set a 12-month price target of just $60, and an 18-month price target of $40 on the stock of the semiconductor processing solutions company, which was trading as high as $126 last week. The report cited commoditization risks, a lack of innovation, and Ambarella Inc (NASDAQ:AMBA)’s “parabolic frenzy” for its scathing conclusion about the company. After the report, Ambarella’s stock plummeted heavily. On Friday, Ambaralla was down by 6.9%. On Monday it tumbled another 19.08% to $96.58. Over 8.9 million shares were traded, which clearly bested the stock’s three-month daily average trading volume of 2.23 million. The reversal came after a meteoric rise since the chip-maker’s IPO in 2012, during which time shares increased 21-fold from their mere $6 offering price. Ambarella has greatly benefited from its partnership with GoPro Inc (NASDAQ:GPRO), for whom it supplies the chips for its wearable cameras. However, as Citron’s report stated, the valuation for Ambarella had it trading at double the projected adjusted 2018 earnings multiple of the sports action camera company, whose coattails it’s being perceived as riding.
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Apart from the latest report and its effects on Ambarella Inc (NASDAQ:AMBA), we must also take into account hedge funds’ positions in the stock. By the end of the first quarter, 23 of the hedge funds we track at Insider Monkey had long positions in AMBA. There were 17 hedge funds in our database which had AMBA positions at the end of the previous quarter. This is a 35% change showing positive hedge fund sentiment.
We at Insider Monkey pay close attention to hedge funds’ positions in companies, especially in small-caps, because our research has proven that tracking hedge funds’ top bets is fruitful. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performance as a whole has been poor. A portfolio of the 15 most popular small-cap stocks among funds outperformed the S&P 500 Total Return Index by 95 basis points per month between 1999 and 2012 in backtesting. The exceptional results of this strategy got even better in forward testing after the strategy went live at the end of August 2012, returning more than 142% and beating the market by more than 83 percentage points since then, and by 4.6 percentage points in the first quarter of this year (see the details).
Another powerful metric to consider is insider trading, which research has also shown to be a great piggybacking method for investors, when it comes specifically to tracking insider purchases (correlation is much lower when it comes to insider sales). When it comes to insider sentiment, CFO George Laplante sold 4,184 shares of the company at $117.60 on June 16, while VP of Marketing Christopher Day sold over 7,000 shares through five separate transactions in June. There have been no recorded insider purchases of the company’s stock.
Let’s move on to a study of hedge fund activity in Ambarella Inc (NASDAQ:AMBA).
How have hedge funds been trading Ambarella Inc (NASDAQ:AMBA)?
The total value of hedge funds’ investment in Ambarella was increased to $188.43 million by the end of the first quarter of 2015 from just $87.92 million at the end of 2014. The stock was up by about 45% during this time, which accounts for some of the gains, but there was still a significant increase in capital even aside from the gains, to go along with the aforementioned increase in total hedge fund ownership in the stock to 23 funds from 17.
Of the hedge funds we track at Insider Monkey, Philippe Laffont’s Coatue Management holds the number one position in Ambarella Inc (NASDAQ:AMBA), worth $72.5 million, which makes up 0.7% of its 13F portfolio. Eminence Capital managed by Ricky Sandler has the second-biggest stake in AMBA, worth $37.9 million, comprising 0.6% of its total 13F portfolio. Ken Griffin’s Citadel Investment Group, Richard Driehaus’ Driehaus Capital, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital are some of the other notable hedge funds which are bullish on AMBA.
The effect of Citron Research was very detrimental for Ambarella Inc (NASDAQ:AMBA)’s stock, but ultimately it’s just one opinion, and there are many others. A lot of smart money is very bullish on the chip maker right now, and nothing significant has effected the company that should sway that. With Ambarella already rebounding by over 8% today, the chance to catch the rebound may have been missed, but if it dips again, we would recommend a buy.
Disclosure: None
