Ambarella Inc: Buy AMBA Calls in Anticipation of New Highs

Ambarella Inc. (NASDAQ:AMBA) with its market capitalization of $2.04B is a developer of semiconductor processing solutions for video that enable high-definition (HD), video capture, sharing and display. The Company combine its processor design capabilities with its video and image processing, algorithms and software to provide a technology platform. It sells solutions into the camera and infrastructure markets, with approximately 27 million system-on-a-chips (SoCs) shipped since its inception.

In the last six months, I have written about trading AMBA call options two times and the stock has not failed to deliver impressive returns both times. My first coverage of the stock was in September in a post titled, “You Can’t Go Wrong with AMBA Calls”.  I did my second coverage of the AMBA options exactly 2 months ago on January 5, in a post titled “Starting 2015 on Profitable Note with AMBA Options”.

In that January post, I recommend buying the buying the AMBA May 2015 55.000 call (AMBA150515C00055000at an asking price of $5.40.

Impressive Performance in Two Months

When I wrote about trading Ambarella call options in January, the company had a market capitalization of $1.53B, its stock was trading at around $52 per share, and the AMBA May $55 call option has an asking price of $5.40.

However, in the space of two months and as at 11:30AM EST today, Ambarella’s market capitalization has increased by 33.33% to $2.04B. The company’s share price has increased by 30.44% to $67.83 and the AMBA May $55 call options has increased by an incredible 125.92%. An interesting point to note is that the shares of Ambarella has recorded 4 new highs in the last one month and it has soared by almost 20% in the same period.

What is Behind the Ambarella Rally?

Shares of Ambarella have been rallying nicely in the last one month and the stock made a new 52-week high $68.50 yesterday. The main reason behind the current rally that will lead Ambarella shares to new highs is the quality of the company’s fourth quarter (Q4 2014) results that was released on March 3. The highlights of the fourth quarter earnings are presented below:

Ambarella reported revenue of $64.7M in the fourth quarter to mark a 62% year-over-year improvement and to beat the consensus analysts’ estimate of $60M.

The company reported GAAP net income of $0.53 per share to beat the consensus estimate of $0.49 and to almost triple the earnings of $0.18 per share from the comparable period last year.

The company’s gross margin on a non-GAAP basis was 64.3% compared to 64.1% from the same period last year

The company also reported total cash, cash equivalents and marketable securities on hand at the end of the fourth fiscal quarter of 2015 at $208.0 million, compared with $143.4 million at the end of the same quarter a year ago

How to Trade AMBA Options

If you are still holding the AMBA May 55 Call from my January recommendation, I recommending selling to close 50% of that position in response to the current dip while managing the remaining position with stop loss orders.

If you are new to the Ambarella party, you can profit from the upcoming knee-jerk reaction as the stock heads toward new highs. I recommend buying the AMBA Aug 2015 65.000 call (AMBA150821C00065000) at an asking price of $7.00.

— Daily Option Alerts

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