GoPro Decline Creating Opportunity In Ambarella

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Includes: AMBA, GPRO, INTC, MBLY
by: Nicholas Palichuk

Summary

Ambarella earnings gained on a revenue decline.

Without their top client (GoPro), their revenues actually had an increase.

Ambarella is moving away from GoPro.

Their new computer vision chip has some "impressive specs"

Ambarellas competitors have been bought out recently for a 650% premium on their current price.

Introduction:

Ambarella (NASDAQ:AMBA) is the industry leader in semiconductors used for video that enables High definition capturing, sharing, and displaying worldwide. With clients such as DJI and GoPro (NASDAQ:GPRO).

It's not often that a company will present their earnings in these two different ways:

  • With their largest client,
  • Without their largest client.

However, this is exactly what happened on Thursday November 30th with Ambarella, and the markets response was a ~15% increase in its value the next morning.

Why would a company that is seemingly declining in demand with a decrease of 11% in revenue of its previous year possibly see an increase in investor attention.

Ambarella's Trailing P/E and Forward P/E ratios are 38.75 and 36.85 respectively, with a P/B of 4.35. These number would not be the numbers that you are looking for in an investment.

The decline in Ambarella's revenue next quarter is expected to be just under 20%. From a potential investors perspective, this sounds awful and the type of stock you should avoid in the near future.

Extra Numbers and information that were presented during the conference call:

Non-GoPro sales have grown 7% from last year.

"Awesome! The action camera market is still growing and Ambarella may still have some growth opportunities there. Enough to warrant a 36.85 P/E is definitely up for debate, but at least they aren't dying."

When you're making an investment "at least they aren't dying", in my opinion, is not the greatest way to make investments.

There has to be a better reason for why investors saw Ambarella as an investment opportunity the morning after earnings.

GoPro:

It's nearly impossible to talk about Ambarella without GoPro. When GoPro announced that their Hero 6 wasn't including an Ambarella chip, Ambarella's stock tanked. The market quickly realized that Ambarella is no longer completely dependent on GoPro for revenue and it recovered within a couple months.

For years, Ambarella has simply been along for the ride with GoPro according to investors. Which is not a wrong thing to say. GoPro has been a significant part of their revenue, but that is changing.

What has Ambarella been up to since they started to make their mark on the action camera industry?

For nearly four years they've been working on a new chip to help best suit Computer Vision advancements called CV1, and are expecting to make revenue on it in Q1 2018.

Computer Vision and CV1:

This is where Ambarella starts to get very interesting.

There are two types of people in the world right now; people that know Ambarella has CV1, and people that don't.

The people that do, are the ones giving Ambarella the over valuation of 36.85 P/E. The people that don't, are giving it the modest valuation of 36.85 P/E.

This last quarter, Ambarella presented their CV1 chip to multiple clients and in the CEO's words "They were impressed with the specs".

I'm going to make the crazy assumption now that these clients have taken a look at what competitors such as Mobileye have to offer with their computer vision chips.

I'm also going to make the assumption that the CEO who has consistently given earnings expectations below the actual earnings 10 quarters in a row, didn't say this phrase lightly.

My understanding of what we are dealing with now is a top of the line computer vision chip that is most likely less than two months away from its first debut on the market.

Competitors:

As I find it tough to properly put a price tag on a growth stock like Ambarella, I look into what the leaders are valuing companies of their industry at.

There is no better valuation of a company than exactly what an industry leader (like Intel in this particular case) would pay for a growth company like Ambarella.

First, lets find a similar company financially.

How about a company with 20% more revenue than Ambarella per quarter and roughly 10% less of a book value.

Seems reasonable. Their YOY revenue growth is significantly higher. Possibly that is something we can expect after releasing a computer vision chip, which clients are "impressed with the specs".

What sort of price tag did the industry leader put on that company?

Intel paid 15 Billion Dollars for Mobileye in March 2017.

Might I remind you that the Market-Cap of Ambarella is currently just shy of 2 Billion.

That's a 650% premium for a company with similar financials that has been able to capture part of the computer vision market.

Conclusion:

Ambarella is entering a market early next year with a chip that has been deemed "impressive" by its potential clients. With competitors that have been bought out for 650% the price of them.

The reason for this price difference is attributed to a couple possibilities.

Previous investors have only seen Ambarella as an action camera semiconductor company and have left while their main client is in a decline.

And the more obvious reason, they are pre-revenue with their "impressive" product.

Come post-revenue, I believe there is a high opportunity for Ambarella to be involved in the same market as Mobileye with a similar product.

Disclosure: I am/we are long AMBA.

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.

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