Ambarella: The Next Big Tech Play You Shouldn't Miss

Mar.20.14 | About: Ambarella (AMBA)

Summary

Ambarella’s strong financial performance displays its solid execution and customer wins.

Ambarella is in partnership with key customers, including in emerging markets.

The GoPro IPO and foray into wearable devices are expected to be big boosts for the company.

Chip maker Ambarella (NASDAQ:AMBA) is having a tough time this year. Shares are down 13% this year already. However, with Ambarella reporting solid financial growth in the previous quarter and the future looking bright, investors should consider buying the stock for the long run.

Recent results were outstanding

Ambarella announced fourth-quarter revenue of $40 million, up 26.8% from the $31.5 million in the year ago quarter. The expected revenue for the current quarter is in the range of $39 million-$41 million. This represents an increase of 15%-21% over last year. The increase in revenue will be driven by strong demand for IP cameras, reflecting a significant gain in market share as well as overall market growth.

On the earnings front, Ambarella's fourth-quarter non-GAAP net income was $8.2 million, or $0.26 per share. This compares with non-GAAP net income of $5 million or $0.18 per share for the same period in fiscal 2013. Non-GAAP gross margin in the quarter was 64.1% as compared to 63.8% in the immediately preceding quarter and 63.3% in the year ago period. So, Ambarella posted positive numbers all around, but there are strong reasons why the same could continue in the future.

A bright future

The growth in Ambarella's camera business will be driven by strong sales of IP security cameras. This market segment continues to be driven by the migration of analog CCTV cameras to high-definition IP security cameras.

Sales of professional IP cameras increased in all regions, but were particularly strong in China, led by Ambarella's key customers Hikvision and Dahua. Ambarella's dedication on fulfilling customer requirements for high-quality, high-definition camera solutions with excellent low-light capabilities, highly efficient encoding, and very low power consumption led to continued success in professional IP cameras.

Looking ahead, consumer Wi-Fi IP cameras for home security systems will be an opportunity for Ambarella to grow its business. In addition to traditional home security companies, telecom and cable network operators are also introducing new cameras and video security services for consumers. The migration of their offerings from standard-definition to high-definition in the future would provide additional opportunities for Ambarella.

In addition, during the fourth quarter, Ambarella saw strong sales of sports cameras, driven by market leader GoPro and its recently introduced HERO3+ Silver and Black camera editions. In addition to wearable sports cameras, Ambarella is continuing to develop wearable camera solutions for social networking and vertical market applications. Ambarella and Google (NASDAQ:GOOG) successfully demonstrated a wearable camera reference design to bring Google's Helpout application and service to a new class of wearable cameras at the 2014 Consumer Electronics Show.

Diversified markets

Ambarella also provides camera SoC solutions for video camera recorders or dash cams in the automotive aftermarket. These cameras are sold primarily in Russia, China, Taiwan and in South Korea. Also during the year, Ambarella introduced its new MotorVu 360 automotive surround view and recording camera reference design.

During Q4, the Korean market leader, Fine Digital, introduced its FINEVu CR-2000 dual channel dash cam solution based on Ambarella's A7LA camera SoC. The China domestic market continues to expand and demand in this market is still dominated by low end, low cost products. But a transition to higher resolution products is expected to create new opportunities for Ambarella. Additionally, in 2014, several companies demonstrated new dash camera products, specifically designed to target the U.S. market.

Ambarella's professional and consumer IP security market was the largest driver of year-over-year revenue growth, followed by its wearable sports cameras. Fourth quarter automotive revenues also increased sequentially. Security camera revenues remained strong across China, North America and Europe, while it demonstrates continued progress with a relatively new security business in Korea.

The sports camera market reported robust year-over-year growth as Q4 remained strong and with the impact of the early Q4 launch of two new GoPro models. However, Ambarella still faces tough competition from low-end solutions being offered, especially in China, though it launched A7LA-based products successfully in the Asian markets and Russia.

A favorable product mix improved the gross margin substantially in the camera market. The IP security market was Ambarella's fastest-growing market driven by the launch of several new customers as well as the steady growth of the overall digital security market.

Ambarella is also keen on research and development, demonstrated by the new 14 nanometer or 16 nanometer process nodes as a part of new chip development. However, the biggest boost for the company will come from GoPro.

The GoPro boost

Ambarella provides best in class SoCs to GoPro, one of the world's best selling cameras which sold over 2.3 million units in 2012. The chips allow consumers to take superior quality videos and share them on various social networking websites instantly after filming. This is the primary reason why Ambarella enjoys a high profit margin of nearly 64%.

According to the The Wall Street Journal, GoPro is planning to go public and filed for an IPO behind closed doors. Following a $200 million investment by Foxconn in 2012, GoPro will probably be valued at $2.3 billion. Thus, the IPO will give GoPro financial backing to expand its business, which in turn will benefit Ambarella.

Growth in the wearable market

In addition, Ambarella is also looking at the wearable camera market and recently unveiled the A7LW wearable camera platform in affiliation with Google for Google Helpouts. The A7LW gives the camera ability to stream 1080p videos at 30fps and has other features like a micro USB slot, WiFi, Bluetooth and 8GB of flash storage. The global wearable devices market is estimated to grow at a CAGR of 43.4% and will hit $30.2 billion in sales by 2018. Thus, Ambarella's foray into the wearable device segment can prove to be fruitful in the years to come.

Conclusion

So, Ambarella has got a lot of good catalysts ahead of it. The company is targeting the right markets and the GoPro IPO could further boost its prospects. The company's earnings are expected to jump almost 27% next year, making it a good buy at just 20 times forward earnings. Hence, investors looking for the next big tech play should definitely consider Ambarella for their portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.