Ambarella Inc

NASDAQ:AMBA   3:59:54 PM EDT
216.79
+0.13 (+0.06%)
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Ambarella's Incredible Growth is Now Under Attack

Fundamentals     




##Symbol##AMBA

Ambarella (AMBA) is one of the most interesting and perhaps most contentious stories in all of financial markets in the last year. The company is a maker of high-definition video chipset and compression software and it leans heavily on goPro (GPRO) as a customer (30% of its revenue). There are some facts.

AMBA stock is up more than 300% in the last year and 50% in just the last three-months. The company is at all-time highs in revenue, operating margins, net income and free cash flow while spending at all-time highs on R&D. There's nothing contentious about that. In fact, if we look at all technology companies above $3 billion in market cap and simply rank them by their fundamental ratings, AMBA is number three behind just Apple (AAPL) and Skyworks Solutions (SWKS). Here's a snippet of that scan.


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➜ AMBA generates $1.40 in revenue for every $1 in expense, which is quite high and above the sector average of $1.06.

➜ AMBA generates $417,000 in revenue per employee which is above the sector average of $349,000.

The contention starts with Citron research, which has called the company grossly overvalued, in a head-to-head open debate with Jim Cramer noting that AMBA's price to sales now stands at a staggering 14.5 to 1, while the semi-conductor industry averages 2.5 to 1. Here's how the story unfolds.



Cramer believes AMBA has a lot of room to grow not just because of GoPro (GPRO), but because of drones. "People are underestimating drones. Ambarella is the brains behind drones," Cramer said on CNBC back in June. Citron on the other hand responded by saying that "the brains behind drones" is factually wrong. "It would be as foolish as saying the camera is the brains that controls the iPhone." Citron points to Intel (INTC), QUALCOMM (QCOM) and NVIDIA (NVDA) as the powerful developers behind the brains of drones. You can read the he said / she said article here: Cramer Versus Citron: The Ambarella Debate Rages On.

I remind all readers that a report just like this one is available for any company for free on CMLviz.com. No e-mail. No login. Free. Forever. Period.

AMBA's revenue (TTM) has risen for more than five consecutive quarters and stands at am all-time high as do earnings and free cash flow. Revenue is growing at a 50%+ clip using the trailing-twelve-month comps and the company has found itself in the (possibly) lucrative automobile OEM business. Garmin announced that its all-in-one dashboard camera for cars utilizes Ambarella's A7LA camera in order to continuously record and save files on accident impact, providing secure footage of when and where accidents happen. It also integrates full collision warning and lane departure warning driver assistance (Source: Best Stocks for 2015: Ambarella Takes the Lead.

Technicals   |   Support: 113.1   |   Resistance: 124.23   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

AMBA has a four bull (high rated) technical rating because it's trading above both its 50- and 200-day moving averages. We do note that the stock is trading below the short-term 10-day moving average.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.

EARNINGS ESTIMATES
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-09-03 $0.73 $80 million $83 million $71 million M Provided by ZACKS


Let's look at the core elements that drive the company's fundamental rating.


Fundamentals Rating Summary



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 248 165 129

Operating Margin (QTR) 1.40 1.17 1.18 RISING

Net Income (TTM US$ Millions) 64 26 20

Levered Free Cash Flow (TTM US$ Millions) 44 30 7 RISING

Research and Development (US$ Millions) 17 13 11 RISING

Research and Development Expense/Revenue 0.234 0.316 0.333 FALLING





Stock Returns and Chart

AMBA is up +57.1% over the last three months and up +106.0% over the last six months. The stock price is up +309.6% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 248165129


Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (in this case its thirteen quarters).

AMBA is not only growing revenue by 51% year-over-year, but it's 5 fundamental (star) rating implies that the revenue acceleration is pushing the core fundamentals of the company forward. While massive revenue growth often times comes at the expense of earnings, free cash flow and operating margins, that is not at all the case for AMBA. The company has been acquisitive, but that too has not hurt any of the other financial measures. Consensus estimates put the vompany at a growth rate of about 15% quarter-over-quarter.

What do all these numbers mean?
AMBA's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Operating Revenues/Operating Expense 1.401.171.18RISING


Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter AMBA showed a ratio of 1.40. As we stated in the introduction, that $1.40 of revenue per $1 of expense stands head and shoulders above the sector average of $1.06. Further, margins are actually expanding as revenues grow. In the chart below we can note the green bar, which indicates an all-time high.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.17. In the last year we can see operating margins are increasing and are also currently greater than 1.0 (the critical level).

AMBA's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was positive (raises the rating).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Net Income (TTM US$ Millions) 642620


With revenue at all-time highs and operating margins at all-time highs, earnings must follow. Net Income (after tax profit) over the trailing twelve months (TTM) for AMBA is up 145% year-over-year, and while some of that is small number math, it's still remarkable.
Net Income (TTM) (aka annual earnings) is trending higher meaning that annual earnings have increased for at least five consecutive quarters, in this case its all thirteen quarters the company has been public (TTM). Further, quarterly net income also hit an all-time high last earnings period.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Research and Development (US$ Millions) 171311RISING


Research and Development (US$ Millions) in the most recent quarter for AMBA was $17 million, up 28% year-over-year and 47% over the last two-years. Interestingly, as the company continues to invest in R&D, its expenditures per dollar of revenue are actually declining which is a very healthy place to be. The coincidence of rising R&D with lower R&D per dollar of revenue points to a strong growth company.

R&D per dollar of revenue for the latest quarter is $0.23. Last year this measure was $0.32 (it's falling).

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the gold line.


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Summary
There are some facts. AMBA stock is up more than 300% in the last year and 50% in just the last three-months. The company is at all-time highs in revenue, operating margins, net income and free cash flow while spending at all-time high son R&D. The facts are not the issue with AMBA. The contentious argument forms when people disagree about the firm's importance in the growing drone market. One side strongly points to AMBA as a critical component with legs to grow and well deserving of a price to sales essentially never seen before in the semi-conductor world. The other side argues that AMBA will face stiff competition and will run out of growth opportunities at such high margins since the firm's technology is not critical for the drone market. If one side turns out to be all or mostly right, this stock is going to move abruptly for its current price.






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