Investors in Ambarella (AMBA) are celebrating the stock's very strong returns since the public offering at the end of last year. While I failed to pick up shares at the public offering, after having an extensive look at at the company, I am at peace having no position at the moment. The cheap valuation at the time of the offering left me "puzzled" about the poor pricing of the offering.
Continued operational improvements have gone in hand with stronger momentum in the stock, resulting in valuation multiple expansion. As such, I would be a bit more cautious, with the slower guided growth into the final quarter, and remain on the sidelines.
Third Quarter Results
Ambarella generated third quarter revenues of $46.0 million, up 29% compared to last year, thereby beating consensus estimates at $44.0 million.
GAAP earnings rose by 36% to $9.1 million, resulting in earnings of $0.30 per diluted share. Non-GAAP earnings came in at $0.37 per share, beating consensus estimates by eight cents. CEO Fermi Wang commented on the developments during the quarter:
We are very pleased with our execution across major markets as demonstrated by the strong Q3 year-over-year growth of 29%. Our penetration into the fast growing, professional and consumer IP security markets continued in the quarter, reflecting our strong competitive position, as well as our broad product roadmap.
Looking Into The Results..
Reported revenue growth was solid, yet gross margins fell by 80 basis points to 63.7% of total revenues. The margin pressure was much less severe on an annual basis compared to the first half of the year.
Fortunately, Ambarella saw sales leverage in operating costs which fell by 140 basis points to 41.8% of total revenues. As a result, operating margins were up by 20 basis points to 21.9% of total revenues. Earnings growth outpaced revenue growth on the back of lower tax rates.
Fourth quarter revenues are seen between $37 and $39 million, up 21% at the midpoint of the range.
Earnings are seen between $5 and $6.5 million, with earnings up 58% at the midpoint of the range.
Ambarella ended the quarter with $128.1 million in cash and equivalents. The company does not hold any debt, resulting in a solid net cash position. Revenues for the first nine months of the year came in at $117.6 million, up 31% on the year before. Earnings rose by 38% to $20.1 million in the meantime. At this pace, annual revenues could come in around $156 million as earnings are seen around $26 million.
Trading around $25 per share, the market values Ambarella at $690 million. This values operating assets at $560 million, or 3.6 times annual revenues and 21-22 times annual earnings. Ambarella does not pay a dividend at the moment.
Some Historical Perspective
Ambarella went public as recently as October of last year. The offering was a big disappointment at $6 per share priced at a huge discount compared to the initial $9-$11 price range. Ever since, shares have shown very strong returns, quadrupling ever since to current highs around $25 per share. After the poorly priced offering, investors have started to appreciate the profitable growth. Between 2009 and 2013, Ambarella has more than doubled its annual revenues to $156 million. Earnings are set to double to $26 million at the same time.
Ambarella remains pleased with the growth, as the company continues to gain ground in the fast growing professional and consumer security camera markets. The optimism is important, given recent product introductions. Besides the security market, Ambarella holds strong market positions in the market for sport cameras and automotive camera devices.
The high quality of the cameras combined with greater storage space is important, thereby improving the usability of surveillance camera's for analysis, notably in the surveillance market. Back in June of this year, I last took a look at Ambarella's prospects. At the time, shares were trading around $17 per share as the company released its first quarter results. Shares have seen an additional 50% upside ever since to current levels at $25 per share.
I concluded that appeal remains after missing out on the public offering in October of 2012. I was puzzled about the reasons behind the failed offering at the time, given the growth, profitability and strong financial position of the firm, and I failed to initiate a position. Ever since, I made a classical mistake of chasing shares, but never being able to buy them.
While the earnings report seems solid, the strong momentum this year has resulted in multiple expansion as well recently. Disappointed with my own failure to act, I am happy not to have a position in the stock at the moment. The solid track record, growth and financial position make shares still a good long term addition. However, increasing valuation multiples at the moment make it easier for me to pass on this one.