Sunday, January 04, 2015

Ambarella: a Play on GoPro is Worth a Close Look

Ambarella (AMBA), based in Santa Clara, California, is a manufacturer of video chips for cameras. One of the company's biggest customers is GoPro (GPRO), the recently public action sports camera maker.  The company has various positive metrics to cause this stock to rise, and not just because of the GoPro connection. The company's chips are also used in security and surveillance cameras.

Let's look at the factors that can make this stock move higher, which includes the markets, the revenues, the earnings, the cash position, and the price of the stock relative to its earnings growth. 

Diverse Markets
One important factor to take into consideration is that the company's chips are used in a wide variety of products, which are used in law enforcement, personal security, and personal life-logging.  Not only are the company's system-on-a-chip products used for wearable sports camera, and IP security cameras, they are also used in camcorders and automotive aftermarket cameras. 

In addition, the chips are used in the fast growing areas of wearable cameras and quadcopter cameras. One other area that the company is advancing into is the high-quality broadcast video processing semiconductors used with high-def video channels distributed through cable and satellite.  This diverse market base helps the company endure downturns in various industries and consumer groups. 

Strong Revenues and Earnings
Investors like stocks with rising revenues and love stocks with rising earnings. AMBA has both.  As a matter of fact, for the latest quarter, net revenues spiked by 42.8%, and quarterly earnings skyrocketed by over 100%. 

On a per share basis, earnings for the quarter were $0.57 per diluted ordinary share, on a GAAP basis versus $0.30 per diluted ordinary share, for the same period last year. This is an increase of 90%. On a non-GAAP basis, quarterly earnings per share went from $0.37 per share to $0.68 per share, an 84% increase. This earnings growth is exactly the type of dynamic that drives stock prices higher, and should certainly boost the share price of Ambarella over the long term. 

No Debt and Lots of Cash
One of the two best financial health strengths of AMBA is the fact that it has no debt. The other strength is that it is flush with lots of cash, amounting to $6.15 per share. Total cash and liquid assets rose from $128.1 million a year ago to $186.5 million at the end of the latest quarter, a healthy rise of 45.6%. This lack of debt and extensive liquidity helps to create a floor under the stock.

Financial Ratios
Although the price to earnings ratio on the stock appears a bit high at 45, it is a growth stock, and compared to other high flyers such as GoPro with a stratospheric P/E of 195, Ambarella is fairly rational. Plus, the forward P/E is more reasonable at 27. 

In addition, the price to earnings growth ratio is a realistic 1.35. This shows that the stock price is in line with the earnings growth. 

First the negatives. Needham & Co. just downgraded the stock from "hold" to "underperform." Reasons include price pressure from GoPro, lowering year-to-year revenue growth, and the high valuation of the stock as it has risen 65% from the beginning of the year.

Now let's look at the positives. Ambarella has significantly increasing revenues and earnings. The company is debt free with plenty of cash. Plus, it has solid financial metrics. To top it off, it has diverse markets, both consumer and government, in fast growing industries. These catalysts all come together to make this stock an investment that should move much higher. For more stock ideas, check out the numerous lists of stocks at


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