Ambarella Becoming A Takeover Target

Bill Maurer profile picture
Bill Maurer
33.34K Followers

Summary

  • Stock down 57.4% from yearly high.
  • Valuation down to $1.5 billion excluding cash.
  • For large chipmakers, this is pocket change.

One of the worst performing stocks in recent months has been chipmaker Ambarella (NASDAQ:AMBA), the company most notably recognized for supplying GoPro (GPRO). Both of these companies have seen dramatic falls in their share prices, with Ambarella down almost 40% since its earnings report earlier this month, seen in the chart below. With the chipmaker's valuation now at a more realistic level, I think this increases the potential for the company to be bought out.

(Source: Yahoo Finance)

At their peak just a few months ago, Ambarella shares traded for nearly $130, giving the company a market cap above $4 billion. I thought the stock was in bubble territory and that was correct. At its peak, the company was trading for more than 10 times future sales (ending January 2017) and about 35.5 times expected non-GAAP EPS for that period. An acquisition then would have probably cost an acquirer close to $5 billion, a bit of a stretch.

Even though Ambarella is expected to post more revenue and earnings growth than the more established chipmakers, that valuation was excessive. As of Monday's close, Ambarella's market cap was down to $1.74 billion and the company has about $240 million in cash with no debt. That would mean that a takeover could be currently had for about $2 billion or so. At that price, Ambarella would go for just about 5 times future sales, a sizable discount to the price Intel (INTC) is paying for Altera (ALTR).

The industry's two giants, Intel and Qualcomm (QCOM), could certainly be interested in Ambarella. Both large-chip names are looking toward the future, and items like drones are a very hot item. Ambarella has a presence in the drone space, which Qualcomm is now entering, as well as the GoPro business. If for no other reason, Intel or Qualcomm might want to acquire Ambarella just to keep the other name for doing so. Sometimes, the best move is to prevent your competitor from doing something rather than just strengthening yourself. Intel needs to diversify away from its PC business, and Qualcomm needs to diversify from its phone business.

Both Intel and Qualcomm easily have the financial power to make this kind of acquisition occur. Intel is spending about $13 billion or so (after net cash) to acquire Altera. Intel also is buying back billions worth of its shares each year, so a temporary slowdown in the buyback could get Ambarella under its wings. Qualcomm bought back $9 billion worth of its shares in the first three quarters of its fiscal year, so it also could slow down its buyback to snatch up Ambarella.

With the fall in shares of Ambarella, I think the name becomes an interesting takeover target for a larger chipmaker. Ambarella is known for supplying GoPro, but the company also has a presence in drones. Intel and Qualcomm are both looking to boost their presence in future devices, and Ambarella would seem to fit in perfectly. Thanks to the fall, Ambarella could be had for around 5 times expected future sales, much less than what Intel is paying for Altera, and Ambarella offers a lot more short-term growth potential.

This article was written by

Bill Maurer profile picture
33.34K Followers
I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have been active in the markets for several years, and am primarily focused on long/short equities. I hold a Bachelor of Science Degree from Lehigh University, where I double majored in Finance and Accounting, with a minor in History. My major track focused on Investments and Financial Analysis. While at Lehigh, I was the Head Portfolio Manager of the Investment Management Group, a student group that manages three portfolios, one long/short and two long only. I have had two internships, one a summer internship at a large bank, and another helping to manage the Lehigh University Endowment for nearly a year. Disclaimer: Bill reminds investors to always do their own due diligence on any investment, and to consult their own financial adviser or representative when necessary. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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