Cramer: Ambarella—Toxic stock or the perfect buy?

An Ambarella illustration from their website
Source: Ambarella
An Ambarella illustration from their website

Jim Cramer couldn't believe his eyes when he saw all of the huge action going on with Ambarella lately. What the heck is going on?

Ambarella is the semiconductor company that makes chips for the high-definition video capture market. In other words, it makes the fancy chips that go inside of GoPro, but it can also be used for drones, surveillance and police body cameras.

The stock ran up going into its earnings report earlier in the month and then took off even higher after the company blew away the numbers. As of Friday morning, it was trading at $127, up more than 100 percent for the year.

"But, whenever a relatively new stock has such an enormous run, the critics are bound to start crawling out of the woodwork screaming that it's overvalued and deserves to go lower. Sure enough, that is exactly what happened here," the "Mad Money" host said.

On Friday, Ambarella was hit with a very negative note from Citron Research, which stated that the stock was ridiculously overvalued and deserved to trade down to $60. Since that time, Ambarella has lost 30 points in two sessions, including the 21 percent it lost on Monday.

When Cramer sees a stock plummet so fast just based on the opinion of the bears, he starts to question the stock. Are the bears or the bulls right?

For starters, the company has had an insane amount of revenue growth, and it is expected to grow even further in 2016. And in 2014 it had 30 percent sales growth; in fiscal 2015, which ended in January, it racked up another 38.5 percent sales growth. The company now expects 48.6 percent sales growth for this year. Those are amazing figures that Cramer believes spur money managers on Wall Street to buy.

The bear thesis on Ambarella comes down to three points, for Cramer. First, they believe that Ambarella will be a victim to commoditization in the semiconductor space; second, they think the company's success relies too much on GoPro; and third, they believe that the valuations for Ambarella are out of control.

So how about the bulls? The argument for the bulls is based on the fact that Ambarella makes the best product andis exposed to the best high-end markets, Plus, the company's fast revenue growth means it should be trading at a monster premium to the average semiconductor stock. To boot, it could be an easy takeover candidate.

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While Cramer has been a fan of Ambarella, even he had to acknowledge that the stock's rally was becoming overheated recently.

"Still, in the wake of this monster selloff, I think Ambarella has become a rapid grower that's now too inexpensive to ignore. You're basically getting the company's most recent spectacular quarter for free at these levels," Cramer said.

So while the stock has had some extreme moves lately, Cramer thinks this could be the perfect entry point for the stock. The long-term story is compelling for him, and he wants in.

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