Ambarella Shares Crushed On Hikvision Blacklisting

Ambarella Inc AMBA shares were falling 10% Tuesday after one of its largest Chinese customers was blacklisted by the Trump administration.

What Happened

Hikvision was one of 28 companies added to the U.S. Entity List of companies restricted from doing business with American companies. The announcement came after the market close Monday. 

Why It’s Important

Bank of America Merrill Lynch analyst Adam Gonzalez estimates Hikvision accounts for between 15% and 20% of Ambarella’s total revenue.

The blacklisting creates a $45-million revenue risk and a 55-cent EPS risk for Ambarella in fiscal 2021, the analyst said in a note. 

The good news for Ambarella investors is that there may still be a way for the company to maintain its Hikvision sales.

American companies can still do business with blacklisted companies if they get U.S. government approval and/or pass a screening process.

The key to determining whether Ambarella passes the screening will likely lie in what percentage of its hardware and software is considered to be of U.S. origin, Gonzales said. 

Only 24% of Ambarella’s global workforce is American, according to BofA. 

Ambarella warned about the potential risks of the trade war in its most recent annual report.

The trade war and Ambarella’s steep valuation make it a risky bet at this point, Gonzales said. 

"Following AMBA’s surprisingly strong Q2/Q3 beat/raise results in late August, we flagged the risk of artificially inflated near-term demand due to inventory stocking (pull-in) in China." 

Bank of America has an Underperform rating on Ambarella with a $50 price target. 

The stock was down 9.56% at $51.75 at the time of publication. 

Benzinga’s Take

With Ambarella shares still up 46.6% year-to-date even after Tuesday morning’s sell-off, the stock still looks fully valued trading at 88.5 times forward earnings. Given Bank of America estimates that up to 30% of the company’s revenue comes from China, Ambarella stock is not for the faint of heart at this point.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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