Ambarella Inc

NASDAQ:AMBA   3:59:54 PM EDT
194.95
+1.43 (+0.74%)
4:53:12 PM EDT: $194.76 -0.19 (-0.10%)
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The Secret is Out: This Growing Tech Company Has Dropped Too Far



Fundamentals

Written by Ophir Gottlieb, 1-20-2015


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:

Our strong third quarter results reflect our success in expanding revenues in new markets such as flying cameras and home security monitoring, as well as existing markets for professional IP security cameras and automotive after-market dash cameras.

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.