5 Terrific Reasons Why Ambarella Should Be In Your Portfolio

| About: Ambarella (AMBA)
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Ambarella's results have been strong, driven by the adoption of its products in different markets.

Ambarella is counting on innovation to drive its growth.

Ambarella has partnerships with companies like Google on the back of its impressive product development.

Ambarella's relationship with GoPro can take it to new highs.

Ambarella's fundamentals are solid and its earnings are expected to grow at a rapid rate going forward.

After starting the year on a negative note, chip maker Ambarella (NASDAQ:AMBA) has now gained some momentum. The stock has risen on the back of several positive trends, including a solid first-quarter earnings report, the GoPro (NASDAQ:GPRO) IPO, and strong opportunity in the end market. In addition, Ambarella has partnered with well-known companies such as Google (GOOG, GOOGL) to sell its camera chips.

Considering the growing usage of cameras in various applications, such as sports, security, entertainment, etc., Ambarella looks well-positioned to improve further going forward. Let's take a look at a few simple reasons why Ambarella should continue getting better.

Terrific results

Ambarella reported a 26% increase in its net profit in the first quarter, led by the strong performance of its camera chips and the growing market for IP security cameras, sports, and automotive solutions. The chip maker posted a non-GAAP net profit of $7.8 million, as compared to $6.2 million in the first quarter last year.

In addition, Ambarella's revenue grew at a fast pace. The chipmaker posted healthy revenue of $40.9 million for the quarter, an increase of 20.6% from last year. Apart from the positive trends in the end-markets, Ambarella's strong product development and the launch of new products such as its 4K IP security chip, the S2, led to robust growth.

Innovation-driven growth

Going forward, Ambarella will continue the trend of innovation that has allowed it to grow its business at a solid rate. On top of the end-market opportunity, Ambarella has a number of key customers that should allow it to sustain its impressive performance in the future. Google, for example, is looking to use Ambarella's chips in its wearable platform. As pointed out in my last Ambarella article:

"Ambarella has also developed a successful partnership with Google. 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."

Ambarella is also focusing on product development to maintain its dominance in the industry. It has introduced new technology such as the SmartAVC H.264 for small businesses and professional IP security camera applications. Its new S2L design has many new features such as high dynamic image processing, apart from providing low bitrate streaming technology, which helps businesses reduce network bandwidth requirements to comparatively lower cloud facility costs and support the use of multiple cameras in home environments.

GoPro is a catalyst

GoPro is another important customer that Ambarella is counting upon to power its growth. GoPro's cameras use Ambarella's video compression and image processing semiconductors, and it does not have an alternative supplier. So, GoPro's prospects are largely dependent on Ambarella's products, and this is a good thing. Since going public, GoPro's shares have risen at a terrific pace, indicating the confidence investors have in its prospects.

GoPro sold close to 4 million of its cameras last year, which are priced between $200 and $400. Additionally, the company is aggressively increasing its online presence and is trying to become a media hub. For example, earlier this year, GoPro entered into a deal with Microsoft (NASDAQ:MSFT) to create its own channel on the Xbox 360 and Xbox One platforms. According to a GoPro press release:

"The GoPro Channel apps will stream on-demand GoPro video content to Xbox Live Gold members worldwide and enable them to purchase GoPro cameras and accessories directly through the app, fulfilled by the Microsoft online store. This is the first time Microsoft has integrated the physical purchase of packaged goods into an Xbox platform app."

Now, there are millions of Xboxes present across the world. As such, GoPro might see a bump in camera sales as Xbox users buy its cameras online. In turn, this will benefit Ambarella as it is the technology provider for GoPro cameras.

Beyond GoPro

But it should also be noted that Ambarella has a diversified product base. For example, FLIR, which is a leading supplier of thermal images and professional IP security cameras, introduced and demonstrated 31 new models of cameras based on Ambarella's SoCs. In addition, Hikvision, a supplier of surveillance equipment, introduced its new line of panoramic IP security cameras based on Ambarella's S2 camera SoCs solutions.

Impressive fundamentals

Ambarella currently trades at a trailing P/E of 36, which might seem expensive at first. However, due to the tremendous growth expected in its earnings, its forward P/E comes down to just 21. As Ambarella's earnings are expected to grow almost 26% next year, it looks like a good buy at the given forward P/E ratio.

Additionally, Ambarella has a solid profit margin of almost 16%, and its operating margin is 16.6%. Moreover, its return on equity also looks good at 18.23%. The chipmaker has no debt, and maintains a current ratio of 6.83, signifying its strong balance sheet. The company also has $155 million in cash, which it can use to invest freely in the business as it doesn't have any debt obligations. All in all, Ambarella looks like a solid prospect from different quarters, and could be a solid buy for the long run.

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.