This Tech Stock's Pullback Is A Solid Opportunity

| About: Ambarella (AMBA)

Summary

Ambarella's shares are down 6% in 2014, however the company's prospects look bright.

Ambarella reported a strong quarter, which is a sign of better things to come.

New product launches will prove to be profitable for Ambarella.

Ambarella is also set to benefit from the GoPro IPO.

Ambarella (NASDAQ:AMBA) is in a good position to benefit from growth in the adoption of wearable devices and action sports cameras. However, the company's performance in 2014 has been disappointing as its shares are down 6%. But a look at the company's recent results indicates that Ambarella looks poised for solid long-term gains, making it a good buy on the pullback. Let's take a look at its recent results and see why it could be a good investment.

Strong results

Ambarella reported an upbeat first quarter with total revenue amounting to $40.9 million, up 20.6% from the same quarter a year ago. Net income for the quarter was $7.8 million, which was more than the previous year quarter's net income of $6.2 million. The adjusted EPS was up 19% at $0.25, beating the analysts' estimate of $0.21 per share.

The expected revenue for the second quarter of fiscal 2015 is between $43.5 million and $45.5 million, 15% to 21% more than the second quarter revenue of the previous year. The estimated gross margin is between 61.5% and 63.5%.

Bright prospects

The professional and consumer IP security market is the principle driver behind the growth of Ambarella. Ambarella has seen success in the professional security camera market globally, and is leading across a wide range of product categories. It introduced its new S2L series of four HD camera SoCs designed for consumer, small businesses, and professional IP security camera applications recently, making it the first to be manufactured in the advanced 28 nanometer technology.

The company's S2L SmartAVC H.264 low bit-rate streaming technology helps reduce network bandwidth requirements to lower cloud facility costs and support the use of multiple cameras in home environments. It has artificially intelligent features such as intruder detection and breaking glass detection. The S2L's multi-exposure, high dynamic image processing delivers magnificent image quality even in harsh lighting conditions. The S2L dewarper, as the name suggests, corrects images captured from wide angle lenses so as to enable cameras that can cover a wide viewing area.

Ambarella proved its mettle during the International Security Exhibition and Exposition in April, when many leading professional security customers introduced new products based on Ambarella solutions. FLIR, a leading supplier of thermal images and professional IP security cameras introduced 31 new models of cameras based on Ambarella's SoCs.

Hikvision, one of the world's largest leading surveillance and equipment suppliers, introduced its new line of panoramic IP security cameras based on Ambarella's S2 camera SoC. Lorex, a leading global supplier of the security camera systems for homes and businesses, based in the U.S., introduced its Little Link portable HD WiFi video baby monitor based on Ambarella's low power A5s camera SoC.

Driven by innovation

The consumer IP security cameras launched during the quarter included Philips new insights and 120 wireless HD home monitor camera based on Ambarella's A5s camera SoC. The company expects continued growth in the IP security market due to the growing revenue from the production swindle of the ultra HD S2 chip, adoption of the new S2L SoCs, and the multiplication of A5s HD WiFi cameras.

In the wearable sports camera market, sales continue to be led by GoPro, with its successful Hero 3 plus camera models. Ambarella is expected to benefit from the popularity of GoPro's wearable cameras as GoPro completely depends on Ambarella for the supply of video compression and image processing chips.

Apart from wearable sports cameras, Ambarella is also developing wearable camera solutions for social networking and vertical market applications. The new Quadcopter is an exciting product category equipped with video cameras to capture views of buildings, wildlife, or sporting events. DJI Innovations, a leading supplier of HD video cameras in China, launched its Phantom 2 Vision Quadcopter with an integrated HD camera based on Ambarella's technology.

Ambarella recently introduced its latest MotorVu's Super HD reference design, which includes full exposure, high dynamic range at full HD resolution to boost visibility in low light conditions. Ambarella is taking up cameras with higher image quality and advanced features, and has new design wins with leading brands in China, Korea, Japan, and Taiwan. The company is working well in all its camera markets, including IP security, sports, and automotive cameras.

There's no denying the fact that Ambarella is the biggest GoPro supplier and GoPro's IPO will put Ambarella into the limelight and give it a much-needed boost. Also, GoPro recently intended on working with Microsoft to develop the GoPro Channel on Xbox Live. Hence, if GoPro sells its cameras to even a small percentage of the very large customer base of Xbox users, it is definitely going to benefit Ambarella.

Conclusion

Quite evidently, Ambarella is making solid moves to benefit from emerging technology such as wearables and camera applications. So, the company's recent drop looks like an opportunity for investors to buy more shares as it could be a good long-term investment.

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