Ambarella: The Next Big Tech Play That Investors Shouldn't Miss

| About: Ambarella (AMBA)

Summary

Ambarella is set to benefit from GoPro following the IPO as the sports-camera maker is highly dependent on the chip maker.

Ambarella's growth in automotive sets it up to benefit from the growing application of cameras in vehicles.

Ambarella has a strong balance sheet, while an enticing valuation makes it a solid buy considering its expected earnings growth.

Action-camera maker GoPro (NASDAQ:GPRO) had an outstanding IPO. The stock has soared since going public, currently commanding a valuation of almost $3 billion. One company that has benefited from this successful IPO is Ambarella (NASDAQ:AMBA), which provides technology to the highly-popular sports action cameras of GoPro. Ambarella shares are up more than 17% in the last month, and it looks like the good times will continue as GoPro uses the proceeds of the IPO to expand and make the business even better.

GoPro is a catalyst for Ambarella

As reported in GoPro's S-1 filing:

In particular, we incorporate video compression and image processing semiconductors from one provider, Ambarella, Inc., into all of our cameras, and we do not have an alternative supplier for these key components. If Ambarella stopped supplying components on acceptable terms, or at all, or we experienced delays in receipt of components from Ambarella, we would experience a significant disruption in our ability to produce our products, and our business would be materially and adversely affected.

This statement reflects the importance of Ambarella to GoPro. Since GoPro has been growing at a terrific pace, it can be expected that Ambarella continues growing along with its illustrious client. As reported by Reuters:

Videos taken using the company's wearable cameras have made a big splash on the Internet. The company says its videos attracted more than 1 billion views in the first quarter on YouTube, where its channel has 2 million subscribers.

Felix Baumgartner's record-setting 24-mile (39-km) jump from a stratospheric balloon was captured using a GoPro camera. That video has attracted nearly 16 million views on YouTube.

Olympic gold medal winning snow boarder Shaun White and 11-time world champion surfer Kelly Slater are among well-known athletes who have endorsed the cameras.

GoPro cameras have also become popular among bands such as The Rolling Stones and Foo Fighters. The company received an Emmy award in 2013 for its contribution to the television industry.

GoPro has seen solid growth in its ecosystem in the past few years. In fact, from 2012 to 2013, the number of videos having GoPro in the title grew 60%. It reportedly brought in $1 billion in revenue in 2013, double of what it did in 2012, selling over 3.8 million HD cameras in 2013. In addition, GoPro has a strong list of patents in order to sustain its growth. According to TheStreet:

GoPro said in its prospectus it has 42 issued patents and 68 patent applications pending in the U.S., and 15 corresponding issued patents and 12 patent applications pending in foreign countries. Those patents include designs for camera's and software, in addition to physical structures, image processing, operational firmware and other types of software.

Ambarella on a solid growth track

Hence, it can be expected that GoPro continues its rapid growth going forward, and Ambarella should continue seeing an improvement in its own financials as a result. The company is already reporting solid growth. For example, its revenue in the first quarter increased 21% year over year to $40.9 million. Its net income also increased to $7.8 million from $6.2 million last year. Going forward, the company is making a lot of moves to improve further, primarily by way of innovation.

Ambarella deals in five areas, namely security IP cameras, wearable cameras, sports cameras, automotive cameras, and broadcast infrastructure solution.

Ambarella saw considerable strength in its security IP cameras. Many of the leading customers in this industry, such as FLIR (FLIR) and Hikvision introduced new products, which were based on Ambarella's technology. FLIR introduced 31 new camera models based on Ambarella's solution. In addition, Hikvision, one of the world's leading surveillance and equipment suppliers, introduced its new line of panoramic IP security cameras, which is based on Ambarella's S2 camera SoC.

Lorex (LOXFF) is another leading supplier of security camera systems. It introduced its new model, Little Link portable HD WiFi video baby monitor, which is based on Ambarella's low power A5s camera SoC. The little link camera enables live remote viewing on smartphones or tablets. Moreover, as the camera is cordless, it can be taken out and used in other locations. Going forward, Ambarella anticipates great opportunities in the consumer security market.

Focus on innovation

Keeping this in mind, the company is constantly focused on improving its technology, which is one of the key drivers of its growth. So, Ambarella introduced S2L SmartAVC H.264, which is a low bitrate streaming technology. This reduces network bandwidth requirements that will consequently lower cloud facility costs and support the use of multiple cameras in home environments. Moreover, S2L's multi-exposure, high dynamic image processing technology delivers robust image quality even in challenging lighting conditions.

Talking about the wearable sports camera market, Ambarella continued with its solid sales momentum, mainly led by GoPro. Particularly, it's Hero 3 Plus camera models were a big hit among the users.

Talking about its automotive market, the company is doing well in some areas, while some are under pressure. Ambarella is facing challenges in Russia and price pressure in China. However, it is gaining momentum in Korea, Japan, and Taiwan, with orders from leading automotive brands.

Overall, the company expects solid momentum in all of its camera markets going forward, including IP security, sports, and automotive cameras. Moreover, the launch of the S2L camera SoC will further enhance its prospects in the security market.

Valuation and takeaway

Another reason to consider Ambarella is its solid valuation. Ambarella currently has a trailing P/E of 36, and its forward P/E looks attractive at 21, which indicates that its earnings will increase in the future. In addition, the company is debt-free and has $155 million in cash, giving it enough flexibility to continue innovating. Moreover, according to analysts, Ambarella's earnings are expected to grow 25.6% next year, which doesn't come as a surprise given its end-market prospects. So, investors should definitely consider Ambarella for their portfolio as it looks set to benefit from the camera market.

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.