I just tripped across a 2-month old draft of my research on incoming competitors/invaders in AMBA’s space that I did not have time back then to compose a post here. Although I no longer have any interest in AMBA, FWIW, I’ll share my take with updated financials.
Although past posts here mention Qualcomm Inc. (QCOM) and Intel Corp. (INTC) as competitors that might or could crush AMBA, none thus far provide any magnitude of the financial differences and technological capabilities among competitors that give tremendous distinct advantages for some over others, and none address or consider the worthiness and possibility of AMBA as a potential buyout candidate.
While AMBA recently has exhibited strong financial fundamentals and experienced rapid growth in revenue, income and earnings, a key concern/lingering question is its sustainability (including margins) in a growing highly competitive landscape. In order to compete and survive, AMBA must stay ahead of the technological curve by committing sufficient capital to fund their research and development. This, however, is where aggressive solid corporate giants, i.e., Samsung Electronics, QCOM and INTC have a monster competitive edge and advantage over AMBA, not only in R&D spending, but also in cash on hand, free cash flow (FCF) and manpower as clearly shown in the following table. AMBA’s $58 million for R & D pales in comparison to Samsung’s $13 billion, Intel’s $11 billion and QCOM’s $5 billion. Likewise, for cash, AMBA $239 million versus Samsung $60 billion, Intel $21 billion and QCOM $17 billion.
AMBA INTC SAMSUNG QCOM
Mkt. Cap 1.85B 162.62B 163.81B 72.96B
P/E (ttm) 24.88 14.82 9.10 15.07
52wk High 129.19 37.90 1,286.85 75.72
Nov 27, 2015 58.47 34.46 1,100.00 48.54
52wk Low 44.45 24.87 850.00 47.52
R & D (billion $) 0.058 11.537 13.179 5.477
FCF (billion $) 0.051 10.313 12.342 4.562
Cash (billion $ mrq) 0.239 21.210 60.73 17.320
Debt/Equity 0% 37% 7% 35%
Current Ratio (mrq) 5.74 2.40 2.45 3.62
FY 2010 0.00% 34.64% 22.09% 25.27%
FY 2011 0.00% 37.38% 16.31% 28.80%
FY 2012 0.00% 25.52% 26.52% 24.44%
FY 2013 207.02% 17.60% 30.14% 28.58%
FY 2014 238.95% 19.67% 19.34% 30.33%
ROIC 251.65% 20.05% 16.40% 20.83%
WACC 18.89% 7.77% 10.81% 12.37%
EVA 232.76% 12.28% 5.59% 8.46%
Employees 598 106,700 235,999 33,000
As shown above, historically, INTC, Samsung and QCOM continue to realize strong returns on invested capital and create value for investors with currently excellent ROIC-WACC spreads (EVA). The EVA for AMBA is out of this world for now, but most likely unsustainable in the near future. However, AMBA’s current value creation is a positive attribute among others that might make it a potential takeover target.
Even if AMBA diversifies by expanding into other areas, it will still be out gunned. overshadowed and overwhelmed by the likes of Samsung, INTC and QCOM, among oathers.
How about the worthiness of AMBA as a buyout target for the following giants?
I believe no deal for Samsung which tries to do almost everything these days in-house. Here’s an 8/11/15 Economic Times interview with a top Samsung Electronics executive at their first ever imaging sensor forum in India, showcasing some new technologies to partners and manufacturers.
What exactly is Samsung’s system LSI business about?
Samsung has a big semiconductor operation - the memory operation is very well known. System LSI has three groups:
• Contract manufacturing for others (the Foundry business),
• The System on Chip or SoC business, which takes care of application processors (Exynos is part of this), and
• LSI (imaging sensors).
If you look at a modern smartphone, there are maybe 20 different semiconductor chipsets in it - LSI takes care of a lot of these, including things like imaging, NFC, SIM card controllers and so on.
We keep seeing smartphones getting smaller. Is it a clear focus of the business to combine different functions into one chip - to save space and make smartphones smaller?
It really depends - you can save some space by integrating different components into one. However, in some cases, it is better to leave them separated. For example, the chip that controls the signal strength can be close to the antenna. Other chips need to be close to the battery There is a trade-off between leaving things separate and miniaturising - we’re always trying to fund the optimum solution. Our competitive edge is to optimise all these aspects for our customers - which are typically device manufacturers.
What kind of other devices will need imaging sensors?
Needs are limitless these days, especially in the Internet of Things (IoT) era. An imaging sensor simply captures the light - other components decide what to do with it. We perceive the outside world mostly through images.
• Automotive is one good example where demand is really increasing. Some modern high-end cars now can have up to 20 imaging sensors built in. Some are used for the more mundane reverse cameras, other more sophisticated systems can track cars and obstacles around you while driving, read and interpret data from traffic lights and signboards, track the driver’s state, warn you if you are too close to other cars or warn you if you are straying from a lane. All these systems rely on imaging sensors.
• Internet connected surveillance cameras for home use are on the rise as are consumer drones with HD cameras.
• Cleaning robots use image sensors too - to detect obstacles and move around them.
Finally, even the medical industry seems to be taking to this. For instance, a company we’re in talks with is developing technologies that use imaging sensors for non-invasive blood tests. This is all possible because these sensors can see spectrum of light that the human eye cannot.
Samsung is a huge threat, crashing the IoT scene big time.
I don’t expect any interest by Intel to acquire AMBA. Why?
Take a look at this 8/26/2015 video, showing Intel CEO Brian Krzanich and Yuneec Electric Aviation CEO Tian Yu cozying up together over a $60 million Intel investment in Yuneec to make drones that will change the world. According to Kranich, The two companies have got “drones on our road map that are going to truly change the world and revolutionize the drone industry.”
Here is more info in a Forbes article;
Yuneec International, a Shanghai-based drone and aerospace company founded in 1999 that makes drones and electric-powered airplanes, has secured a more than $60 million investment from Intel’s venture capital arm. Intel has also invested in drone companies Airware and PrecisionHawk as it seeks to sidestep the declining PC market by betting on the possible commercial use of drones.
Yuneec’s newest Typhoon drone features 4K, 30fps HD video capture is priced at $1,299.
INTC also has an Internet of Things Group exploring areas of interest and opportunities.
QCOM most likely has no interest buying a small sweet potato like AMBA. Here’s why. In order to maintain its position among its giant competitors (INTC, Samsung and others), in April 2015, QCOM sold $10 billion worth of debt to fund its aggressive share buyback program and earmarked up to 50 percent of the proceeds for strategic acquisitions. After competitor INTC snapped up Altera Corp. in a $16.7 billion deal, and smaller competitor Avago Technologies (AVGO) made a $37 billion bid to takeover Broadcom Corp, analysts and investors have been waiting for a major acquisition move by QCOM. Although Skyworks Solutions’ name has come up, I don’t think SWKS is a target because of Qualcomm’s commitment to develop its own one RF solution disruptive technology that, if and when successful, will deliver a major blow to SWKS, as well as AVGO, Qorvo, Inc. (QRVO) and others in the RF arena. Some pundits, however, believe SWKS is an attractive QCOM target as a provider of chips and components for everything from cars and medical devices to GPS systems and smartphones. So, the big question remains on hold as to where and what QCOM will make a significant strategic buy.
Ironically, QCOM was able to recruit Yuneec Electric Aviation as the first customer for its Snapdragon Flight platform for drones because, soon after, Yuneec received a $60 million investment from Intel, a QCOM competitor. The QCOM Snapdragon Flight robotics dev platform is specifically designed for one of the world’s smallest 4K flying cameras that will be released in 2016 by Yuneec at affordable prices, targeting a rapidly growing consumer drone segment.
Here is a recent Fortune article on QCOM cheap drones. [my emphasis in bold]
Qualcomm has crammed a lot of features on a single chip designed to bring the cost of a drone down below $300, with a reference design it showed of on Thursday. To watchers of the chip firm, this will come as no surprise. This is exactly what Qualcomm did in the cell phone world—shoved a bunch of different classes of semiconductors into one system on a chip and then managed to dominate the market for awhile.
By deeply integrating the radios and processors on a chip, Qualcomm reduced the space that the electronics took up inside of cell phones, lowering the cost of those materials and requiring less power to run. Qualcomm is doing something similar with the newly launched Qualcomm Snapdragon Flight reference design.
In shoving navigation, video processing and computation all on the same system on a chip, Qualcomm also created a virtuous cycle by reducing the overall size of the board and battery required to power the electronics. A smaller battery reduces the weight, which reduces the motor size, and in general, leads to a smaller and cheaper device. Qualcomm already has a customer called Yuneec in Hong Kong designing a drone around the new Flight platform.
Perhaps I am overlooking something significant, but at this time I just don’t see “must haves” in the AMBA arsenal that the big guys urgently need and eventually can develop and have on their own, given their huge R &D budgets and financial resources. In the short term, AMBA could continue to prosper as a provider in the supply chains of video surveillance companies and drone companies like Dajiang Innovation Technology Co. (DJI), China’s first company to pioneer drone making and currently the leader of the pack, accounting for more than 70% of the consumer drone market. However, expect a lot of companies and upstarts crashing and crowding these spaces as well as the IoT arena.
As always, conduct your own due diligence and decision-making.