Far too many investors have a mistaken belief that if a retirement strategy is focused on dividend income growth, that there is no room for any wealth building growth stocks. While that tends to be the more conservative path that dividend investors take, I believe that when a company has the clear and apparent potential for strong share price appreciation, a prudent allocation of funds is more than acceptable, and can significantly increase the total return of any retirement portfolio.
I believe that Ambarella (NASDAQ:AMBA) fits the bill.
Letting The Numbers Do The Talking
When I first began following AMBA (check this out), I was focusing on the 4k technology that will be used for the newest LED televisions. Of course, I had already accepted the fact that AMBA was the leader in this top of the line technology in sports cameras, auto rear view imaging cameras, and security cameras.
While I was much more forward looking in my original report, I will focus on the here and now of the company and let the numbers do the talking. The luxury I have is that at the current share price, the stock has already surpassed my initial prediction of a 100% gain from the time I first wrote about it, and it still has not tapped the UHDTV market as of yet.
The growth is quite clear as you can easily see from the latest 8-K report.
Revenue for the first quarter of fiscal 2015 was $40.9 million, up 21% from $33.9 million in the same period in fiscal 2014. Gross margin under U.S. generally accepted accounting principles (GAAP) for the first quarter of fiscal 2015 was 62.5%, compared with 63.9% for the same period in fiscal 2014. GAAP net income for the first quarter of fiscal 2015 was $5.3 million, or $0.17 per diluted ordinary share, compared with GAAP net income of $4.7 million, or $0.16 per diluted ordinary share, for the same period in fiscal 2014.
Quite frankly, what else needs to be said? As far as I am concerned, AMBA has performed more than just ok, it has put itself in a position to grow in each category for the near, intermediate, and long term in two areas:
- Continued growth in the business sectors AMBA already dominates: Security cameras, Auto rear view cameras, and high end sports video chip technology.
- The "speculative" possibility that the entire company will be bought out by the number one brand in the entire business, GoPro (NASDAQ:GPRO). I say speculative, however it does make sense from a business standpoint since AMBA is a major supplier to GoPro in virtually all of its highest quality products. Since GoPro has gone public, and received well over $200 million from its IPO, the company can think about acquiring its largest supplier to enhance its own margins, and consolidate its efforts with the guts of its hardware being under the global roof of itself; reduced costs, higher margins, in-house capabilities.
While it is pure speculation on my part, it makes considerable sense, and while AMBA is still a small company (under $800 million enterprise value) it would not be out of reach as a logical buy-out candidate. That being said, AMBA has proven that it can go it alone regardless, just by looking at the numbers and its growth rate.
Kevin Cassidy at Stifel Nicolaus, who covers Ambarella, estimates that GoPro now represents about 25 percent of the company's business.....Cassidy says that the Wang and his partner have sold two other companies and he sees Ambarella as a "possible acquisition candidate."....."Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA) or Intel (NASDAQ:INTC) are possible candidates, and I wouldn't rule out Google or Facebook (NASDAQ:FB), either," he said
The Balance Sheet Is Wonderful
The basic metrics I use to determine if a stock is worth an investment are as simple as I can make them:
- A forward PE of about 22.20 is very reasonable for a strong growth company.
- Over 43% of all shares are still held by insiders, 10% by institutions.
- Zero debt.
- Year over year growth in both earnings and revenues.
- Market expansion within the business sector with GoPro going public.
All income goes directly to the bottom line and since there is ZERO debt, the company has only one basic obligation; grow the business with reinvested capital from operations.
Total cash and marketable securities on hand at the end of the first fiscal quarter of 2015 were $155.6 million, compared with $104.3 million at the end of the same quarter a year ago.
It appears that the cash register is growing at a rapid pace, and as the CEO, Fermi Wang stated:
"We are very pleased with the financial results of our first fiscal quarter of 2015.....During the first quarter we achieved revenue of $40.9 million, up 21% from the same period last year, driven by continued growth in our IP security camera business. We believe the expanding markets for innovative, high definition professional and consumer cameras will continue to give us the opportunity to grow our revenues in the year ahead."
A Growth Stock In A Retirement Portfolio For Income
I believe the growth of AMBA is just getting started. Each of the business sectors continue to grow and AMBA is the "go to" company for high quality. As the business grows, the share price should reflect not only actual growth now, but future potential growth as well. The company is making plenty of money, increasing revenues, and has no debt.
While it does not currently pay a dividend, this stock makes sense as an investment that could produce substantial capital appreciation, which can be re-deployed right back into the dividend income growth stocks that remain the key foundation of a retirement portfolio; for income.
What better way to increase overall wealth and available funds to be reinvested into our dividend champion stocks, than to have a real winner offering rapid growth in value?
It is my opinion that AMBA is a buy at current levels, and on any pullbacks.
Disclaimer: The opinions of the author are not recommendations to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.
Disclosure: The author is long AMBA, FB. 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.