Below is a cross post from the RB AMBA board. The italics part is what someone else posted and the text below that is my response. My main point is that I think that some people seem to be very hung up on the rise in AMBA’s stock price and think it’s expensive for that reason alone…
AMBA is in the Rule Breaker portfolio. I don’t think any mathematical calculation on value or future value (PE, PEG, DCF, etc) would ever justify a RB price. Try this on NFLX. Valuations of this type are for more mature businesses. A year ago, AMBA had 0 units sold for drones. This quarter was 400,000. How does that factor into future growth- 0% to 100%.
I think you have to have a mix of RB’s and steady eddies that minimize beta. You may never buy a RB using Benjamin Graham principles.
Maybe it’s true most of the time that RB stocks can’t justify their stock price based on future earnings. However, using an assumption that earnings growth will continue as it has over the past year, you can, in fact, justify the stock price based on valuation. Specifically, earnings grew 114% from a year ago to the current level. If they do that again then earnings in a year will be $5.22 per share. At the current price of $118 that would be a P/E of 22.6. Then if they grow earnings by 114% again the following year then the P/E drops to $11.17 per share giving it a P/E of 10.6. The earnings growth rate is one of the most important factors when valuing a company by fundamentals and just looking at P/E completely ignores earnings growth. The 64000 dollar question is what are earnings going to be in the future. I do not know but I do know that their end user markets are growing extremely fast and their margins are high and stable. I think how quickly this whole drone thing has materialized has taken a lot of people by surprise (hence the rapid rise in share price). We should not forget that home security, automotive, sports video, video proliferation in general, and maybe law enforcement video are all growing very fast…it’s not just drones. Certainly, the business opportunities for AMBA look very bright. For these reasons, I’m not selling any shares.