Written by Ophir Gottlieb on April 1st, 2016. First posted on: news.cmlviz.com
PREFACE
There’s a small cap tech marvel that is participating in some of the most radically innovate themes moving technology forward that has been crushed by the market. The stock has dropped from just below $130 in July, to $35 and has recently bounced back to $45 on big news.
But here’s the secret: Wall Street has overreacted and thrown the baby out with the bathwater.
STORY
We are now looking at a technology company with a $1.5 billion market cap at an all-time high in revenue, turning a healthy profit and now setting foot in thematic trends that show extraordinary growth.
AMBA’s most recent tumble came after GoPro (GPRO) reported another atrocious quarter. GPRO is AMBA’s largest customer, making up fully 30% of revenue. But friends, things have gotten totally out of control with Ambarella and the bearish herd has gone too far.
THE COMPANY
AMBA is a maker of high-definition video chipset and compression software which means it spans all of technology from AAPL and GOOGL to TSLA, INTC, QCOM and NVDA. The stock is down, but oh how the tide is turning. Let’s start with a chart of revenue (TTM) for all-time.
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Ambarella’s revenue is up 50% year-over-year to now over $300 million in the trailing-twelve-months. Now, that growth is coming to a bit of halt – call it a pause as GoPro goes through a disastrous demand problem with its products.
But the key here for AMBA is how it has placed itself in some of the most powerful and transformative technology trends in the world. Here we go:
TRANSFORMATIVE THEMES: DRONES
First, as a video chipset maker, we can think of AMBA as the “eyes” to technology. It’s certainly not the only one, but it has a product which has set itself apart. Let’s start with the drone market:
The drone was named as one of the four critical new technologies at the Consumer Electronics Show (CES) this year and we can see how the market has legs to grow. Morgan Stanley’s Joseph Moore just wrote a bullish note on Ambarella – we’ll take bits and pieces of it as it fits in the broader scope of the company’s technological innovation. Here’s what he had to say about drones:
2. Ambarella generated over 10% of last year’s revenues from drones, at margins well above the corporate average.
3. He believes that Ambarella will see several new drone product launches over the course of 2016.
Source: Barron’s
Moore goes on to warn of competition from Qualcomm (QCOM) and Intel (INTC) – certainly true, so much so that AMBA could be a takeover candidate if it makes too much headway in this market. But there’s so much more.
Amazon.com (AMZN) is soon to be using a fleet of drones that will make delivery times measured in minutes. It’s an astounding disruption in and of itself, but the demand for drones is going to explode as this type of customer connection becomes the standard.
AMBA is positioned beautifully for the growing drone segment.
TRANSFORMATIVE THEMES: SURVEILLANCE
Ambarella’s chip-sets (eyes of the camera) are making headway in to the less than sexy but explosive video surveillance market. Here’s that chart from Statista:
Gone are the days of the black and white, grainy convenience store surveillance cameras. We now live in a world where surveillance is not an afterthought – it’sthe thought. This goes to the commercial side as well as the enormous government surveillance programs.
TRANSFORMATIVE THEMES: SELF-DRIVING CARS
Ambarella will be producing a “computer vision chip.” This is how Moore describes it (emphasis added):
Initial use cases will be in drones and security cameras, though Ambarella expects to see its computer vision chip enabled for use in automotive OEMand Tier 1 within two years of taping out the chip.
Stop there. Now we’re talking about the self-driving featured market for automobiles. Here is the theme AMBA is after:
We’re looking at 134% compounded-annual-growth rate for the next five years ending at 10 million cars by 2020.
AMBA is entering the Advanced driver assistance systems (ADAS) market. Remeber, Tesla’s (TSLA) Elon Musk calls the Apple (AAPL) Car “an open secret.” Ambarella now has a customer base that could include companies like Tesla (TSLA), General Motors (GM), Toyota ™, Apple (AAPL), Google (GOOG), BMW, and many others.
AMBA will be competing with Mobileye (MBLY), which in fact calls many of the companies listed above as customers already, but whatever success it has, it’s entering with foundation of strong technology into a market desperate for “more and better.”
Remeber, video-chipsets are the eyes – and so much of the self-driving technology today is based on artifical intelligence and deep learning – all of that requires the the visual cortex as the starting point. Apple, Google and Tesla already know it.
If we just peruse the AMBA website we get product descriptions with phrases like: 360-Degree Surround View; E-mirrors; Latency-free, video that outperforms; Advanced Driver Assistance Systems; Drive Recording.
All the catch-phrases you want from a firm that is already the “eyes” to other technologies.
Source: Ambarella
WHY THIS MATTERS
Let’ just turn back to Moore’s commentary, he did a bang-up job:
Source: Barron’s
Yes. Exactly. Ambarella has thrust itself forward yet again into the transformative themes that will drive technology for the decades to come, and, in a more general sense, the company has thrust itself into the guts of semi-conductor makers.
So what now? Is the stock a buy?
SEEING THE FUTURE
Start with true innovation, the kind that turns companies from small caps into mega caps, the kind that sees stocks double, triple or even quadruple, that only occurs when two critical phenomena collide.
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