Ambarella Inc

Fundamentals

Written by Ophir Gottlieb, 1-20-2015
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PREFACE

Ambarella has been crushed during this market tumble, dropping from just below $130 in July, to now $35. But we are now looking at a technology company with a $1 billion market cap at an all-time high in revenue, earnings and free cashflow and making inroads into one of the four critical technologies of the future.




But here's the secret: Wall Street has overreacted and thrown the baby out with the bathwater. Ambarella has huge upside and the consensus one-year price target is $77.50 -- or more than 100% higher. The low price target is $60 and the high is $105 (Source: NASDAQ.).

STORY
AMBA's most recent tumble came after GoPro (GPRO) reported another atrocious quarter. GPRO is AMBA's largest customer, making up fully 30% of revenue. But friends, things have gotten totally out of control with Ambarella and the bearish herd has gone too far.

AMBA is a maker of high-definition video chipset and compression software which means it spans all of technology from AAPL and GOOGL to TSLA, INTC, QCOM and NVDA. The stock is down 70% since its highs in summer. Here's the one-year stock chart.



Yes, the company leans heavily on GoPro as a customer, but oh how we may be missing the forest for the trees. Let's start with a chart of revenue (TTM) for all-time.



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Ambarella's revenue is up 62% year-over-year to now over $300 million in the trailing-twelve-months. This is a growth company, no doubt about it. But it's a special kind of growth company. Here's the secret -- Ambarella turns a profit.

EARNINGS
The concern for AMBA is customer and product diversification and CEO Fermi Wang addressed that on the earnings call:


But, in the same breath the company's CFO warned of rising inventories in the wearable sports camera market (aka GPRO) that will have a "substantial effect" on fiscal 2017. The company is now forecasting full year revenue growth of 15%-20%, below AMBA's stated target of 20-25% growth. A lot of this is bad news for GoPro, but AMBA is still looking very strong.

Here's a chart of the company's net income (aka after tax profit) . The bars represent numbers rolled up into trailing twelve-month (TTM) figures and the orange line represents the quarterly numbers.



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Look, a profit -- at all-time highs.

AMBA also dominates both the connected cameras segment and the drones segment of technology. A step back from the weakness in one segment and the realization that the company is diversifying into the other reminds us that a stock down 70% but still growing quite quickly is very compelling.

INNOVATION & GROWTH
AMBA continues to grow its expenditures in research and development (R&D) rapidly. Here's an all time R&D chart.



R&D is up over 40% year-over-year and over 60% over the last two-years. Where is this R&D going?

AMBA supplies specialized, high-end microprocessors for an exploding new technology segment that is entering every aspect of our lives. Their largest customer is a Chinese manufacturer that is the world’s top maker of these devices. And as if that wasn’t enough, Ambarella has announced it will begin selling its own.

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WHY THIS MATTERS
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I am long AMBA as of today for $35.

Thanks for reading, friends.