Saul,
I’m enclosing an article on AMBA and would greatly appreciate your thoughts about it.
AMBA has been a wonderful stock and still appears to have legs, even in the current market down turn for small aggressive stocks like AMBA. It is my third largest poison.
Thanks!
Jim
Ambarella Investors Should Seek Shelter After The Stock’s Strong Run
Sep. 25, 2014 10:46 AM ET | 12 comments | About: Ambarella (AMBA), Includes: GPRO by: Wall Street Playbook
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…)
Summary
Taking money off the table following an almost 500% two-year run is the smart thing to do.
These shares, which trade at a P/E of almost 50, are valued on the assumption of perfect execution.
While Ambarella enjoys solid margins today (up 330 basis points to 65%), history has proven that margins don’t expand forever.
There’s no such thing as a perfect stock, but shares of Ambarella (NASDAQ:AMBA), a semiconductor company that specializes in high-definition video capture solutions, are trading on the assumption that management will execute to perfection. That’s a lot of pressure.
Following the company’s impressive 24.6% year-over-year revenue jump and solid earnings beat, the stock spiked up to a new all-time high. Shares are now up almost 500% since Ambarella went public in Oct. 2012.
Investors have made a lot of money. For new investors, however, the best play here is to wait for a pullback. At around $37 per share, patient investors can get this stock for $30, or 15% below current levels. There’s no point in chasing the stock here.
Consider Ambarella’s price-to-earnings ratio of 48, which is more than twice the industry average of 22, according to Yahoo Finance leaves no margin for error. While the company has quickly established a track record for exceptional growth, Ambarella’s valuation, which has ballooned to more than twice that of Intel (NASDAQ:INTC), is getting out of control.
Similar to GoPro (NASDAQ:GPRO) and other momentum stocks, Ambarella investors are betting on infinite growth. The company, by its strong three-quarter guidance, has done a stellar job at selling its ability to deliver on expectations.
For the current quarter, management believes it can deliver revenue between $60 million and $64 million. This represents a revenue increase of 14% to 22% higher than Wall Street’s expectations of $52.5 million. There’s nothing conservative about that guidance. It’s bold.
Aside from strong demand in its security camera applications, management anticipates strong growth in the company’s home monitoring and sports cameras. Ambarella is riding the wave of popularity of GoPro.
The other thing is, while Ambarella enjoys solid margins today (up 330 basis points to 65%), history has proven that margins don’t expand forever - especially with companies that deal in consumer electronics. Like GoPro, at some point, the competition will catch up to Ambarella. This is the part investors are overlooking.
Accordingly, it doesn’t make sense to pay 35 times forward earnings for a company that’s still less than two years as a public issue. Devices like cameras and audio/video chip technology become commoditized quickly. When, say, Samsung (OTC:SSNLF) or Sony (NYSE:SNE) decide they want to test Ambarella’s waters, it won’t be pretty what happens to Ambarella’s pricing power.
Operating expenses, which stand today at 43% and inline with estimates, will have to drive higher. It will be the only way for Ambarella to maintain and/or grow its market share. Likewise, the company’s operating margin of 21.7% is impressive, especially for a relatively young company. This is, however, still 5% bellow the operating margins investors can get from either Texas Instruments (NASDAQ:TXN) or Intel.
What’s more, both shares of Texas Instruments and Intel - albeit much larger - are trading at a fraction of Ambarella’s price-to-sales ratio, which stands at a whopping 6.41, or more than three times the industry average.
In other words, Wall Street expects a lot from this company in the next several quarters. What’s more important to consider is the company’s ability to deliver on the bottom line. While investors continue to cheer Ambarella’s revenue projections, the company also issued gross margin guidance to be between 60% and 62%. This would represent an almost 3% year-over-year decline.
For a stock that’s trading at near 52-week highs, that’s not the message investors appear ready to receive. This is, nonetheless, a signal that taking money off the table following an almost 500% two-year run is the smart thing to do.
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