Ambarella (AMBA), Inc. is a developer of semiconductor processing solutions for video that enable high-definition video capture, sharing and display. The Company combines its processor design capabilities with its video and image processing, algorithms and software to provide solutions in four segments: Broadcast Encoding, IP Security, Consumer Video, and Automotive Video. This report considers the revenue implications of Ambarella's geographic breakdown, examines growth opportunities in markets that have remained largely untapped, and offers a valuation based on projected future cash flows and comparables analysis.
Geographic Revenue Breakdown
Ambarella has an office in Santa Clara, CA, but states in their recent 10-Q that "As of July 31, 2013, substantially all of the Company's long-lived tangible assets are located in the Asia Pacific region," indicating, correctly, that Ambarella is heavily invested in that area. In the notes to the consolidated financial statements from that Q-10, Item 11, under the "Recent Accounting Pronouncements" section, the following geographic breakdown of revenues can be found:
In the three months ended July 31st, 2013, revenues from Europe, North America, the United States, and the Asia Pacific region, excluding Hong Kong, totaled $4.52 million, or just under 12% of total revenue - this up from just under 11% in the same period in 2012. The remaining 88% of revenues is derived from the Hong Kong region, driven by the sale of automotive dash cameras and low end IP security cameras like the ones found on Alibaba pages like these. Most of these cameras use the A2S (later replaced by the A7L-A) and A5S SoC solutions, released in 2007 and 2010 respectively, and precursors to the more exciting high end chips that receive most of the attention currently.
Returning to the 10-Q, the next section under Item 11 labeled Major Customers states:
"Wintech, the Company's logistic provider, and Chicony, a direct ODM customer, combined accounted for approximately 87% and 82% of total revenue for the three months ended July 31, 2013 and 2012, respectively, and approximately 84% and 81% of total revenue for the six months ended July 31, 2013 and 2012, respectively."
Presumably Wintech and Chicony are responsible for most of the cameras being sold in the Hong Kong region. These customers are the primary source of revenue for Ambarella and a far cry from the GoPro sports camera or Dropcam home monitoring solutions making headlines recently. Nevertheless, these partnerships are fundamentally a strength as they consistently turn silicone into cameras and revenue so Ambarella doesn't have to; growth in other segments and regions is simply gravy. Of course, greater diversity is to be desired and may well be on its way thanks to integration of Ambarella's high end solutions in Western products and markets.
GoPro was developed by Nick Woodman while trying to find a better way to create high intensity sports footage. The original model, released in 2005, used 35mm film, while the next could capture video in 512X384 standard definition; all subsequent models have used Ambarella SoC and are rated for water resistance up to 30 meters (~100ft). Amabrella's A7 powered the first GoPro Hero (released in early 2010) and allowed recording in 1080p for the first time, while the Hero 3+ Black Edition, debuted in October of 2013 uses the A7L chip to record at 4K resolution at 15 fps and 1080p at 60 fps for high quality slow motion playback.
Privately owned GoPro grew from sales of $350,000 in 2005 to over $500 million in 2012, and expects to double that figure again in 2013 (per this 60 Minutes report). Footage is easy to upload to YouTube and provides a fabulous self sustaining marketing program that can only grow with users' creativity. While quality, size, and convenience are all good, the true secret to GoPro's success has been the price point: for under $400, what adrenaline junkie or casual active lifestyler would pass up the opportunity to relive their finest moments in HD and Ultra HD quality? The appeal is broader than sports wearable consumers; research institutions, public servants, parents, and many other everyday consumers can think of a use for a great camera in a small form factor. Footage that was once relegated to professional equipment and Hollywood can now be produced by anyone with a GoPro camera. This video contains a good mix of action and fun, and shows just how powerful the camera can be.
Dropcam is a new U.S. based partner using Ambarella technology. The new DropCam Pro offers improved low light recording, higher sound quality, and easy wireless connection to a home network. Built around the A5s Soc, the Dropcam Pro can record 1080p at 30 fps and take 14 megapixel still shots simultaneously, while industry leading compression allows two separate video streams for smartphone monitoring and instant uploads to Dropcam's cloud service. This partnership was announced on Ambarella's website on October 23rd, and will begin registering revenue within the fiscal year. A statement made by Dropcam's management reads:
"Our engineers have worked closely with Ambarella since we began designing the Dropcam product line. Together we are delivering cameras with the highest video quality in a compact, low power design."
This indicates a strong relationship that should continue to drive revenue growth into the foreseeable future.
Ambarella has limited back data from which to draw valuation, but there is enough (as far back as 2010 in some cases) to project revenues and cash flows for the remainder of 2013 using quarterly growth rates from years 2010 - 2012. Revenue growth using these projections yields a revenue growth of 38.89% Y/y, based on increased earnings in the Western markets. CapEx and changes in working capital are based on historic levels drawn from the available back data.
12' - 13'(Forcast) GR
GR After 2018:
Change in WC
CG value 2018:
Total Value of CF:
Numer of Shares:
Ad. 2018 CF:
PV of Future CF:
Calculations for an aggressive growth rate of 53.85% based on quarterly projections as far as year end 2014, and a conservative estimate of 27.83% based on the historic growth rate between 2010 and 2012 have been included in the following table:
2yr Quarterly Forecast GR
2012 - 2013 Forecast GR
Avg. 2010 - 2012 GR
Weights are based on simple assumptions that growth will most likely fall in the intermediate range, potentially in the conservative range, and only with great luck in the aggressive range. The weighted discounted cash flow analysis yields a target price of $26.80, or 22% upside from the November 18th closing price of $21.97.
Comparable analysis reveals a similar valuation. Texas Instruments (TI) and Micron (MU) both develop semiconductors and the latter has a division, Aptina, devoted to solutions similar to the ones produced by Ambarella. Omnivision (OVTI) develops similar products with a greater emphasis on large infrastructure IP security.
|Market Cap||P/E||P/B||P/S||ROE||Op. Margin||EV/EBITDA||Profit Margin|
|Current Price:||Deviation from Avg:||40.54%||76.87%||26.23%||-35.97%|
Were Ambarella trading at multiples determined to be average in its industry, valuations between $13.20 and $35.76 are deduced, with an average valuation of $26.16, approximately 60 cents short of the valuation implied by the weighted average cash flow analysis.
Ambarella is a rapidly growing player in the HD recording SoC industry that includes the IP security, home monitoring, automotive, and sports camera markets. Although significant revenue is derived from lower end solutions in the Hong Kong area, partners like GoPro and Dropcam indicate a growing demand for Ambarella solutions in Western markets that have formerly been relatively insignificant to Ambarella's revenue stream. A valuation analysis reveals over 20% potential upside on both a DCF and comparables basis, and best of all, Ambarella holds ZERO debt and has over $100 million in cash available to fund its operations. If you are interested in investing in the growth of IP security and high quality consumer video with limited downside risk, Ambarella is a solid bet.