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In January of 2013 Ambarella Inc. (NASDAQ:AMBA) introduced its latest innovation, the A9 System on a Chip (henceforth known as SoC) at the International Consumer Electronics Show (CES). Prior to the show the stock rallied for the then recent IPO and sold off for the month following to a low of $9.04/share. A classic buy the rumor, sell the news trade that would eventually have many of those sellers kicking themselves.

Fast forward to the end of the year, we see Ambarella trading to all-time highs, rising 250% for the year. The success of the stock some might say is a result of riding the coattails of the GoPro Hero 3, the wildly popular camera considered by many to be the industry standard for HD action sports recording. The truth though is that since 2011 (a year before becoming a publicly traded company) Ambarella has managed to diversify their customer base and increase profits.

Looking at the recent parabolic move on the back of news regarding a Google partnership, it may seem hard to buy into this momentum name, but what follows will be a look at why you should consider a long position in Ambarella for 2014.

Company Profile

As per the company's investor relations site:

"Ambarella is a leading developer of low-power, high-definition video compression and image processing semiconductors. Our products are used in a variety of High Definition (NYSE:HD) cameras including security IP-cameras, wearable sports cameras, digital still cameras and automotive video recorders. Ambarella technology is also used in television broadcasting infrastructure systems with video content encoded and transmitted to audiences around the world.

Additionally, Ambarella SoC's are well suited to drive the latest generation of security IP-cameras as well as aftermarket automotive cameras and volume production shipments have been deployed worldwide."

Not just GoPro

Consumer interest in the GoPro Hero3 cameras has been reaching ever higher, with search inquiries through Google indicating that interest this December was approximately 14% higher year over year. While the Hero3 cameras do display the capability and versatility of what can be done with the Ambarella SoC's, there may be a market offering even greater growth on the individual consumer end... home surveillance.

DropCam, the security camera using Ambarella's A5S SoC, has seen Google search inquiries rocket higher compared to December 2012 to the tune of 188%. While the absolute number of searches is dwarfed by the GoPro counterpart, the growth potential should not be overlooked.

Google Helpouts

Until the announced partnership between Google (NASDAQ:GOOG) and Ambarella, my knowledge of Google Helpouts was limited. In fact, for many whom Google is just a search engine (those who don't actively use Google+ and its other initiatives), hearing that Ambarella is partnering with Google to advance Helpouts is mostly meaningless. So for those in the dark, here is a brief description:

"With Helpouts you can get help anytime from people with expertise across a range of topics - teachers, counselors, doctors, home repair specialists, personal trainers, hobby enthusiasts, and more.

You can choose who to get help from based on qualifications, availability, ratings, and reviews. Also, you can choose to get help right away or schedule a Helpout for later.

While some Helpouts are free, you'll need to pay for some. Paying for help is easy using Google Wallet."

So how does Ambarella benefit from this collaboration? Together with Google, Ambarella will help develop a wearable camera that will be able to simultaneously store and stream live HD video wirelessly to the Google Helpouts server.

While a project such as this may increase R&D expenditures, any performance by the company that meets or exceeds the expectations of Google executives will warrant such costs. Partnering with Google now could also be a gateway towards incorporating Ambarella's SoC's into Google Glass. Currently Google Glass incorporates a Texas Instruments SoC and can currently take 720p video and 5MP still photos. In terms of resolution capability (and considering Frame rate), Amabarella's SoC's are capable of providing greater imaging possibilities than what Texas Instruments has available with its existing OMAP's (Texas Instruments' SoC's).

Potential Acquisition Target

An investor should never use the potential of a company to be the target of a takeover as justification for buying stock. That said however, it doesn't hurt to mention as a footnote the possibilities. In my eyes, Ambarella is a perfect target to be acquired, the market cap is less than $1 Billion, yet the company is a leader in SoC innovation and development. The company carries with it no long term debt and generally speaking the company holds a clean bill of fiscal health. This could be a nice addition to larger semiconductor player looking to expand their product line. Not to mention any benefits that might come along with acquiring a company with a firmly established customer base.

Though the price tag may seem a little daunting, especially given the recent moves higher and the premium over the current price that would need to be offered, I believe it could be easily justified. PE and PEG ratios paint a deceiving picture because, in my opinion, analysts have low balled their earnings and growth estimates for the company. What is relevant is that the company has proven over the last 3 years its ability to keep costs stable and grow revenues and ultimately their free cash flow.

From the company's 10-k Filing:

"The global semiconductor market in general, and the video and image processing markets in particular, are highly competitive. We expect competition to increase and intensify as more and larger semiconductor companies enter our markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect our business, revenue and operating results.

Currently, our competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow markets. Our primary competitors in the camera market include CSR Plc (who acquired Zoran Corporation in August 2011), Fujitsu Limited, HiSilicon Technologies Co., Ltd. and Texas Instruments Incorporated, as well as vertically integrated divisions of consumer device OEMs, including Canon Inc., Panasonic Corporation and Sony Corporation. In the automotive aftermarket camera market, we compete against Core Logic, Inc., Novatek Microelectronics Corp. and Sunplus Technology Co. Ltd. Our primary competitors in the infrastructure market include Intel Corporation, Magnum Semiconductor, Inc. and Texas Instruments Incorporated (NASDAQ:TXN). Certain of our customers and suppliers also have divisions that produce products competitive with ours. We expect competition in our current markets to increase in the future as existing competitors improve or expand their product offerings and as potential new competitors, such as Broadcom Corporation, NVIDIA Corporation (NASDAQ:NVDA), Qualcomm Incorporated (NASDAQ:QCOM) and Samsung, enter these markets."

Ambarella acknowledges that bigger players could enter the field, but does not go as far as to say by what means that could be accomplished. Any of the larger companies mentioned in the latter statements have the financial capability as well as existing infrastructure to acquire and integrate Ambarella into their operations.

*Not to start the acquisition rumor mill, but after seeing Google make acquisitions of Motorola Mobility and Boston Dynamics, is it so far fetched that the same company might acquire a semiconductor company that would integrate nicely with its previous purchases? Just something to consider.*

Conclusion

Ambarella management has shown evidence that the company is willing to increase R&D spending to remain at the helm of innovation. Furthermore its collaboration with Google will only help to advance the company's development of new products. Given the growth of the markets in which Ambarella's SoCs are utilized in, I am confident in the long run potential of Ambarella as a company and in the positive future price action of the stock.

Source: Ambarella: Continued Momentum For 2014

Additional disclosure: I am long AMBA using Call options with both near and long term expiration dates.