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Ambarella (AMBA) made its public debut on Wednesday. Shares of the developer of semiconductor processing solutions for video which enables HD, video capture, sharing and display, rose more than 1.0% on their first day to $6.06 per share.

The Public Offering

Ambarella develops semiconductor processing solutions for high-definition video solutions. The company combines processor design capabilities with expertise in video, image processing and software. Ambarella's system-on-a-chip delivers exceptional video and image quality, combined with low power consumption.

The company sold 6.0 million shares for $6 a piece. Ambarella raised $29 million in gross proceeds in the offering process. Based on the offer price of $6.00, the firm is valued at $155 million.

The offering is quite a disaster. The offer price was set far below the low end of the preliminary $9-$11 price range set by the firm and its bankers. The firm eventually sold 4.9 million shares, with 1.1 million shares being offered by selling shareholders.

In total, 23% of the company's shares were offered. At Friday's closing price of $6.23 per share, the firm is valued at $161 million.

Major banks which brought the company public were Morgan Stanley, Deutsche Bank, Stifel Nicolaus and Needham & Co.

Valuation

Ambarella was founded in 2004 and has sold 27 million units since the formation of the company. The company based in Santa Clara, is focused on specialty products such as sport cameras, automotive cameras and security cameras. Ambarella supplies its products to original end manufacturers including Robert Bosch, Samsung Electronics and Motorola Mobility. Ambarella's top 5 customers, account for 46% of total revenues for its fiscal year of 2011.

For the full year of its annual 2011, the company generated revenues of $97.3 million up 2.7% on the year. Net income fell from $13.9 million in 2010 to $9.8 million in 2011.

For the first six months of 2012, revenue growth accelerated. Revenues for the first half of 2012 came in at $53.9 million, up 22.7% on the year. Net income rose from $3.0 million last year, to $7.8 million.

Ambarella will use the net proceeds of the offering to increase the firm's working capital and acquire complementary businesses, products or technologies. Furthermore the firm hopes to increase access to the public capital markets and increase its visibility in the market.

Excluding the offering proceeds, the company operates with $65.4 million in cash and equivalents. Ambarella operates without any short and long term debt, but has $50.9 million in convertible preference shares outstanding. Adding $29 million in gross proceeds from the public offering, the firm operates with a net cash position of roughly $40 million.

As such, the valuation of Ambarella's operating assets comes in around $120 million. Based on a rough annual revenue estimate of $100 million, the market values the operating assets at 1.2 times annual revenues. The company could earn $12 million for 2012, valuing the firm at 10 times annual earnings.

Investment Thesis

The offering of Ambarella was not so successful. Shares were offered far below the initial guided price range of $9-$11 per share. Shares were eventually offered at $6 per share, and saw a modest rebound to $6.23 at Friday's close.

As such, shares are trading some 38% below the midpoint of the initially guided range. I am slightly puzzled what the reasons could be behind the lack of demand for the offering. The valuation of Ambarella seems very fair, and even cheap. I understand that investors have concerns about the revenue concentration of Ambarella's top customers, but this sell-off seems overdone.

I am slightly more optimistic. Venture-capital firm Benchmark Capital Partners is selling just 500,000 shares in the offering, roughly 2% of shares outstanding. It is a vote of confidence that other venture-capital firms Matrix Partners and Walden International are not selling shares in the offering, each holding over 10% of shares in the company.

Ambarella will retain all available funds to support current and future operations. Shareholders should therefore not anticipate any dividends in the near future.

The offering did not go well, and I have not been able to find out exactly why. I will continue to do more research on the company and might decide to initiate a long position in the company in the coming week. Until then, I urge readers to respond if they have information regarding the lack of demand for the offering.

Source: Ambarella: Puzzled On The Reasons Behind The Failed Offering