Ambarella: Use The Pullback For Solid Long-Term Gains

| About: Ambarella (AMBA)


Ambarella has a big opportunity ahead as the market for wearable and action cameras improves.

The company's relationship with Google and GoPro has given it good visibility and a chance to improve sales.

Ambarella has a diversified customer base in several markets, such as Russia and China, which gives it ample opportunity to grow the business.

The company's focus on product development and an attractive valuation are more reasons why the stock looks interesting.

Chipmaker Ambarella's (NASDAQ:AMBA) stock price performance has been weak in 2014. Although Ambarella has gained more than 200% in 2013, the company seems to have hit a rough patch this year, with shares losing over 20%. But the good news is that this decline gives investors an opportunity to buy a fast-growing stock that seems to be in a solid position to profit from the increasing usage of camera solutions across different applications.

Ambarella's one-year price target according to Yahoo! Finance is $32.40, indicating an upside of 16% from current levels. However, this estimate can move higher with time given the robust adoption of the company's imaging solutions.

Robust growth and prospects

Ambarella has witnessed strong growth in its camera business, led by robust sales of IP security cameras. As a result, the chipmaker's revenue grew 27% to $40 million in the fourth quarter. In addition, Ambarella's non-GAAP net income of $8.2 million, or $0.26 per share, was up 64% from the year-ago quarter.

Ambarella's prospects have received a shot in the arm through its relationship with GoPro, the maker of high-definition personal cameras that are often used in extreme action video photography. GoPro recently introduced the HERO3+ silver and black camera editions, for which Ambarella supplied its solutions. In addition, Ambarella is also planning to develop wearable camera solutions for social networking and vertical market applications.

Ambarella has also developed a successful partnership with Google (GOOG, GOOGL). Ambarella and Google demonstrated a wearable camera reference design to bring Google's Helpout application to wearable cameras at the Consumer Electronics Show 2014. Google's Helpout is a way of sharing knowledge and expertise over live video. The new wearable camera for this application will be able to record full HD video, and simultaneously stream live video and audio wirelessly to a Google Helpout server via a smartphone or Wi-Fi access points.

Hence, both Google and Ambarella are working upon next-gen products to drive the adoption of wearable cameras, and this could be a solid growth driver for both.

Tapping more markets

Ambarella is also targeting the nascent market for quadcopters. Quadcopters are equipped with video cameras and enable users to capture high-quality videos of wildlife, sporting events, etc. Ambarella has already seen some success on this front, as DJI Innovations of China recently introduced its Phantom 2 Vision Quadcopter with integrated HD video camera. Phantom 2 is based on Ambarella's A5s camera SoCs, and provides 1080p video recording, along with 14-megapixel images and a wide 140-degree field of view.

Ambarella is also seeing strength in the automotive market. Driven by the popularity of its chip solutions for video camera recorders and dash cams in Russia, China, Taiwan and South Korea, Ambarella saw a strong performance from this category in the previous quarter. To increase its expertise in this segment, Ambarella recently introduced MotorVu 360 automotive surround view camera. This camera comes equipped with four full 1080p HD camera modules that can be fixed at the front, rear and the sides of a vehicle; providing a 360-degree view for driving and parking assistance.

The MotorVu 360 also provides a four-channel black-box recorder for recording road incidents. Ambarella has built the MotorVu on its B5 family of receiver/transmitter companion chips. These chips help in the transmission of video data at a low cost. Ambarella is looking to accelerate the production of this chip, as it has received a positive response from customers in automotive aftermarket.

Ambarella has developed partnerships with many market leaders and suppliers across the world that are manufacturing products based on Ambarella's A7LA SoC and A5s camera SoC solutions. Fine Digital (OTC:FNDGF), which leads the Korean market, has introduced FINEVu CR-2000 dual channel dash cam solution that is based on Ambarella's A7LA platform. In Russia, more than 20 new models based on Ambarella's A7LA camera SoC are being shipped, while in China, a move from low-end, low-cost products to higher-resolution products in 2014 should lead to stronger adoption of Ambarella's products.

Valuation and conclusion

From a fundamental point of view as well, Ambarella looks like a solid investment. The stock trades at a trailing P/E of 31.61 and a forward P/E of 18.77, which means that solid earnings growth is expected in the future.

Also, Ambarella has no debt and a decent cash position. This gives the company freedom to either raise debt or invest heavily in its development without any covenants in place. Thus, Ambarella looks like a solid investment option from different angles, and investors should definitely not ignore it.

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.