Ambarella (AMBA) mid-quarter review
Let me preface by emphasizing that I am not a techie, and therefore what I am giving on my own very inexact impressions, which may definitely include misunderstandings. Besides which, Ambarella is much more difficult to analyze than some of the others I’ve done these reports on.
Who is Ambarella?
This company was founded in 2004 and is headquartered in California. It develops products for video that enable high-definition (HD) video capture, sharing, and display worldwide. Their system-on-a-chip puts video processing, image processing, audio processing, and other functions onto a single chip for delivering high image quality with low power consumption. It delivers products for wearable sports cameras (GoPro, etc), automotive aftermarket cameras, security cameras, personal (think police, etc) cameras, and drone cameras, among others. They also have products to manage IP video traffic, broadcast encoding and transcoding, and IP video delivery in the infrastructure market. The company sells its solutions to original design manufacturers (whatever they are) and OEMs.
What is your history with them?
I first took a position in AMBA about two and a half years ago at about $13 and $16, but I haven’t been in them all the way, having been out from time to time for reasons I don’t currently remember.
Don’t chip manufacturers become commoditized?
Yes, that usually happens because competitors make cheaper competing products, causing the company’s margins to fall and fall. That’s one of my worries about Ambarella, and why I recently reduced my position from 7.5% to 5.5%. I think that they currently have a good technology lead, but my worry is that after a while competitors may be able to make a “good enough” alternative, at a cheaper price. The problem is that after a certain amount of image precision in video, making it better does no good because the eye can’t see the difference. On the other hand, many current security cameras give pretty grainy pictures and there should be a big market in upgrading them, perhaps almost indefinitely as the picture can be enlarged to see better, etc, and better definition in drone cameras will definitely be valued.
What about sports cameras like GoPro?
Well, GoPro’s stock price has been as high as $94 or so, and is now at $20, and there is a lot of speculation that the fad is over, as well as lower priced competitors taking market share. I don’t know. Ambarella sells to the low priced competitors anyway, but if the fad is over, or at least quits growing rapidly, Ambarella could lose a chunk of its growth.
How has Ambarella stock been doing?
Well, in the six months or so they’ve been as high as $126, as low as $50, and are now at $58. They’ve had multiple Best Buy recommendations from various MF services at various times. They currently have an adjusted PE of 19.8 and they have been growing trailing adjusted earnings at well over 100%.
Wow, they are more than 50% off the high? What happened?
Well actually, nothing HAPPENED. It’s what people are worried may happen. Their fiscal quarters are Apr, Jul, Oct, Jan, so they haven’t reported October yet. However, their adjusted earnings have been straight up:
2011 $0.45
2012 $0.83
2013 $1.10
2014 $1.98
That enormous rate of growth has even accelerated as their last four quarters adjusted earnings are up to $2.98, which is up 136% from $1.25 in the four previous quarters. Gross margins are steady, or even up a percent or so at 65%, so they aren’t being commoditized yet. Trailing four-quarter revenue is 285.5 million up 64% from 173.9 million the four previous quarters.
To summarize.
This one is a little tougher to figure. All the current metrics look great. The concern is about the future with three main worries:
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What happens when increased video definition becomes superfluous?
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What happens when the sports camera craze becomes replacement, and no one wants to bother replacing the camera he or she has?
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What happens if cheaper competitors catch up?
This is answered by big new markets: police cameras, security cameras, drone cameras, etc. We’ll have to see how it plays out. At a PE of 20 it is no longer wildly valued, but it’s not clear whether growth will continue as before, decrease but still be good growth, or even become shrinkage. Investing in Ambarella is a bet on the middle outcome, I think. But I’m definitely not sure!
Hope you found this interesting, entertaining, and useful.
Saul
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