As you may have remarked I sold out of my AMBA position some weeks ago. Well over the weekend I looked over Anirban’s excellent work-up and decided to go back in with a small position. I’m sure Anirban won’t mind my reposting his write-up (in a slightly abbreviated form I used for my own notes.

Here it is:

Dec 2014 – Sep quarter results – Anirban’s Take
Revenue was $65.7 million, up 42.8% from $46.0 million.

Nine months revenue was $153.6 million, up 30.5% from $117.6 million.

Gross margin was 63.3%, stable with 63.7% a year ago.

Adj net income was $22.1 million, or 68 cents per share, from $11.1 million, or 37 cents. That’s up an awesome 84% per share! Also, note that this shows the operating leverage.

Nine months adj net income was $41.8 million, or $1.31 per diluted ordinary share, up from $25.0 million or $0.84. This is also an impressive 56% increase.

Cash of $186.3 million, with $17 million added this quarter. Balance sheet is strong.

Guidance: Jan quarter revenue between $57 and $60 million, which would be 43% - 50% revenue growth. Adj net income between $15 and $17 million, with diluted share count around 33M, or about 50 cents, up from 26 cents.

Adjusted trailing PE (using a stock price of $47) is about 30.

Conference Call Notes

GoPro cameras strong sales primarily drove revenues

Professional IP security cameras market growing strongly in China as analog CCTV is being replaced.

Quadcopter and drone used for video shooting and this could be a new opportunity.

During the quarter, market leader DJI introduced its Inspire quadcopter, featuring an integrated 360 degree video camera for aerial filmmaking. The Inspire uses Ambrella’s A9 SoC to shoot Ultra HD video and to capture 12 megapixel photos.

They expect strong sales in wearables camera market, drone market, IP camera market, and automative aftermarket in the coming quarters.

There was some interesting talk about the ASP for wearable cameras. It appeared to me that while there are some high-end camera where the ASP is showing improvement (about 30%), this is somewhat dampened by the entry level models. They still expect this market to improve YoY.

There was some discussion around long-term growth rates. Here that means looking out next year. The company is projecting 20-25% growth in revenues. So for next quarter, they are modelling between 45 - 50% growth but looking ahead they are expecting some slowdown in growth. They said that the second half of fiscal 2015 saw high growth because of new product launches. Right now, they can’t tell about product launches next year.

Concluding Thoughts

With the earlier run-up in the share price, I did sell half of my stake in AMBA. I‘m happy with that decision. AMBA is growing strongly, no doubt about that, but its fate seems to be tied too closely to GoPro’s progress. Personally, I‘m not really sure if GoPro is here to stay or a fad that will fade away, hence my hesitation to allow the AMBA position to become bigger and bigger with the share price appreciation. I do like their interest in the drone market, IP security camera market, the automotive market etc.

On a trailing basis, AMBA is actually decently priced. On an adjusted basis, it’s going for a PE of low 30’s and with longer-term outlook being revenue growth of 20 - 25% this seems to me to be pretty fair pricing.

Going forward, we need to watch how fiscal 2016 will unfold. Is the camera market slowing down? Management is modelling significantly lower growth for fiscal 2016 compared to 2015. AMBA is working in wining designs in the automotive sector and these take some time to work out. Some may fizzle out as the thing with Google seems to have fizzled out (It was noted in one of the answers by the CEO.). So, right now, I ‘m going to just keep my position as it. I ‘m going to watch what they say in Q4 and I will be looking to add if there is some non-sensical drop in the price. I ‘m targeting trailing PE below 30, say mid 20’s would be where I would actually look to add some. If opportunity arises, I might write some shorter-term puts with the intent to getting assigned.

If you’re still with me, here’s a MF article on AMBA.

Dec 2014 – MF RB Take - Ambarella’s Third Quarter Looks Sharp

AMBA’s results continue to prove we’re living in a high-def world. They sell their systems-on-chips (SoCs) to a wide variety of video-capturing customers, and they’re lapping it up.

Here are my three key takeaways from the earnings call:
Their technology is driving the industry.
The consumer market is hot.
The commercial market is lukewarm (but with big potential).

Ambarella’s Tech Is Driving the Industry
Ambarella once again demonstrated that it’s not simply keeping up with industry demand, it’s defining it. The company launched its first products that use the newest HEVC video compression standards, which process higher-resolution video more quickly and use less bandwidth.

This is a clear sign that the company is a step ahead of the competition. Rather than resting on its laurels as the technology leader, Ambarella keeps pushing the industry to a higher standard (this time, literally). This is creating a technological barrier to entry. It’s difficult for rivals to develop products that can keep up.

The Consumer Market Is Hot
Ambarella has been getting quite a bit of business from another company on the RB scorecard, which recently launched three Hero camera models in the consumer market, all of which exclusively use Ambarella as the SoC provider. The Hero 4 Black and Hero 4 Silver both use Ambarella’s newest A9 SoC, and the entry-level camera uses its A7.

We saw a glimpse of the effect that Hero sales have had on Ambarella’s top line. Chicony Electronics (which buys from Ambarella and then distributes to GoPro) accounted for 41% of Ambarella’s revenue, up from 25% last year. (The pie is also getting larger, as that was $27 million this year and $11.5 million last year.) It’s clear that GoPro’s action-sports cameras are receiving a very warm welcome in the consumer market, and Ambarella’s top line is certainly feeling the love.

There are also quite a few more consumer applications likely to be on the horizon. Chinese aerial vehicle manufacturer DJI just introduced its new Inspire 1 quadcopter, which will use Ambarella’s A9 to capture ultra-high-definition (4K) video. Drones are a hot topic these days, and I would expect to see Ambarella components in quite a few.

The surge in the consumer market is great, but we should also keep an eye on Ambarella’s margins. Management said that when GoPro started using Ambarella’s A9 in its high-end cameras, it increased the average selling price by 25% to 30%. Ambarella’s gross margin has held steadily above 63% since its IPO, which is impressively high and a clear sign that the company has a competitive moat. If new customers continue to opt for the highest-end products, we’ll be in great shape.

The Commercial Market Is Developing
Ambarella also alluded to several commercial customers. ATT introduced new cameras as part of its Digital Life security package. Bosch, Dahua, and Hikvision are releasing similar security cameras as well. Ambarella believes the security camera market is 70 million units, many of which are older analog models that are desperately in need of an upgrade.

The company also talked a bit about Taser, which is now equipping its electric self-defense devices with cameras (targeting law enforcement officers, but certain to make it into a few YouTube college pranks as well). The company is looking to transition the video to high-definition, and Ambarella has an opportunity to be a supplier.

The commercial market isn’t as full-throttle as the consumer market, but it does have some interesting opportunities with large customers.

The Foolish Bottom Line
Ambarella has been our most recommended Best Buy Now during the past year, appearing in our list in 7 of the past 12 months. Even with the stock flirting with all-time-highs, we see plenty of future opportunities for its best-in-class SoC products. We’ll be watching for the margins, the drones, and the stock price to all continue to fly higher in future quarters.