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Tags: Ambarella | AMBA | Stock | David N. Frasier

The Camera Never Lies: Recent Pullback in Ambarella Presents Buying Opportunity

By    |   Friday, 25 April 2014 07:33 AM

Ambarella (AMBA) is one of those stocks that’s been in the news quite a bit lately, but which many investors are unfamiliar.

Ambarella designs and develops low-power, high-definition video compression and image processing applications for the capturing, sharing, and display of high-definition images.

The company’s products are used in a variety of high-definition cameras, including sports cameras, wearable cameras, automotive video cameras, and security and surveillance cameras that can send and receive data over the Internet.

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The Santa Clara, Calif., company’s technology is also used in television broadcasting, with TV programs transmitted worldwide using its video compression chips.

Ambarella’s semiconductors enable video cameras to record high-quality video with minimal blurring and for the images captured by those cameras to be shared instantly on social media sites or Wi-Fi-based platforms.

The company’s integrated circuits enable cameras that use its chips to be smaller and to operate with less power than competing products.

Ambarella was founded during 2004 and became a publicly-traded company on Oct. 9, 2012.

On Dec. 20, 2013, the company announced that it’s exploring a new class of wearable cameras with Google for Google’s Helpouts service. That service enables people to connect, via the Internet, with experts in any given field and to get the assistance from those experts on any given topic through live videos provided over the Internet.

Google plans to use Ambarella-based wearable cameras, which can record full HD video while simultaneously streaming live video wirelessly to the Google Helpouts server via a smartphone or Wi-Fi access point, to produce its Helpouts videos.

The company’s technology will enable Google’s pre-qualified experts to see live video from the trainee’s perspective, or vice versa, in an effort to support the interactive teaching of sports, fitness, art, cooking, engineering or any other hands-on activity.

In regard to automobile cameras that use Ambarella’s technology, the company announced on Jan. 6 that it’s now offering a new semiconductor design that enables cameras used in automobiles to provide 360-degree surround view for driving or parking assistance, as well as for the simultaneous “black box” recording of road incidents.

In regard to its security and surveillance cameras, on March 31 Ambarella introduced a family of Full HD camera System on Chips (SoCs) designed for consumer, small business and professional camera security applications.

The company’s technology enables security cameras that use its semiconductors to reduce network bandwidth requirements, lower cloud-based storage costs, and to support the use of multiple cameras in home environments while providing intelligent video analytics such as intrusion detection or audio analytics such as breaking-glass detection.

While the developments mentioned above bode well for Ambarella, I would expect a public offering that might be executed later this year by GoPro, a well-known producer of action cameras, to have an immediately positive impact on Ambarella’s stock.

Although GoPro has not made any specific announcements regarding its plans to go public, the company announced on Feb. 7 that it had filed confidential initial public offering documents with the Securities and Exchange Commission to sell its common stock to the public.

In case you’re not familiar with GoPro, the company makes tiny, wearable cameras that are often used by skiers, surfers and other action sports enthusiasts to capture and produce high-quality video. (Thrill seeker Felix Baumgartner used a GoPro camera to record his televised free fall from space during 2012).

In addition to benefiting from GoPro’s future growth prospects, I would expect Ambarella to receive favorable attention from the financial media in the event that GoPro were to provide more information regarding its plans to go public. That’s because Ambarella is the only supplier of video chips that are used in GoPro’s cameras.

I expect Ambarella to also benefit over the next few years from several trends that are still developing concerning the capture and distribution of video. For example, recent improvements in HD video capture quality, device size and cost have enabled video capture functionality to be incorporated into a growing range of mobile devices, including smartphones, tablet computers, wearable cameras, and automotive aftermarket cameras.

Because of those improvements, research conducted by Cisco Systems during 2011 indicated that the use of mobile video applications would grow at a 90 percent compounded annual growth rate from 2011 to 2016.

Meanwhile, the adoption of high-speed broadband and the proliferation of connected devices such as smartphones, tablets, laptops, desktop computers and connected televisions have enabled individuals to easily produce, download and share videos over the Internet.

As a result of those developments, International Data Corp. (a global provider of market intelligence for the information technology, telecommunications and consumer technology markets) estimates that more than two billion people will watch streaming video over the Internet during the year 2017.

In regard to Ambarella’s recent operating results, the company grew its net income by 41 percent for the fiscal year ended Jan. 31, 2014, as compared to the prior year, on a 30 percent increase in the company’s revenues. Even more impressive, Ambarella grew its cash flows from operating activities by more than two-fold for the fiscal year ended Jan. 31, to $34.4 million, from $10.5 million for the prior year.

Ambarella is very strong financially, with its cash alone covering all of the company’s financial obligations by a ratio of 5.3-to-1 as of Jan. 31, 2014. That huge cash stockpile places Ambarella in a position to acquire competitors, to continue to develop leading-edge products and/or to buy back large amounts of its outstanding stock.

With my research indicating that Ambarella will grow its net earnings per diluted share at an annual average rate of at least 30 percent during the next few years, and the company’s stock closing yesterday at an earnings multiple of approximately 31, now appears to be a good time for aggressive investors and stock market speculators to allocate a portion of their financial market assets to AMBA.

The stock fell 15 cents to close Thursday at $27.65 in Nasdaq trading.

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Editor's Note: David Frazier has advised subscribers to his investment newsletter to purchase shares of AMBA.

David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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Ambarella (AMBA) is one of those stocks that's been in the news quite a bit lately, but which many investors are unfamiliar.
Ambarella, AMBA, Stock, David N. Frasier
Friday, 25 April 2014 07:33 AM
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