AMBA Stock: Keep an Eye on This One

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Ambarella Inc (NASDAQ:AMBA) is an investor’s vision to behold. This California-based company develops semiconductor processors that enable high-definition (HD) video capture, sharing and display. Its processors can be found in a variety of devices — everything from sports cameras to aerial drones.

ambarella-inc-amba-stock-185-2Furthermore, AMBA is in great position to tap into the wearable camera demand for police officers. Its recent financial performance continues to skyrocket and it has the potential to take advantage of developing opportunities.

After a closer look, AMBA is clearly a stock to buy.

If there is a way to record video in a device, AMBA has found the way to do it. Its processors are found in a variety of products: sports cameras, including GoPro Inc (NASDAQ:GPRO) and Xiaomi; security cameras; aerial drones and automotive cameras,  including rear- and side-view cameras.

But it is AMBA’s wearable camera that is getting the attention. Its wearable security reference design kit allows for the development of a compact, ultra-low power, body-worn HD video camera that can be used by police officers.

There is a growing government and public demand for law enforcement to carry wearable cameras. In the wake of the shooting death of Michael Brown by police officer Darren Wilson in Ferguson, Missouri last summer, President Barack Obama proposed that the federal government help pay for 50,000 wearable camera units for police departments.

Should the proposal meet congressional approval, the government would match 50% of state funding of cameras, up to $75 million over three years.

Not only is AMBA in great shape to meet its existing and growing market demands, analysts think the company is differentiating itself from the competitors over the long term. According to Canaccord’s Matthew Ramsey:

“Ambarella’s lineup of application-specific video encoding processors is differentiated in terms of video quality, video compression efficiency and power efficiency. We believe leadership in each of these vectors is both significant and sustainable and will allow Ambarella to maintain its leading market share position…”

AMBA by the Numbers

AMBA’s recent financial results are remarkable. Its year-end revenue of $218.3 million was an increase of 38.5% from the previous year. It’s part of a continued winning streak for AMBA — the company has grown its annual revenues by at least 24% since 2012. 

Furthermore, AMBA’s management expects the revenue growth trends to continue. Its first-quarter revenue projections range from $64 to $68 million, representing an increase of 56% to 66% over the same period last year. This accelerated growth is due to the launch of new products from existing customers including Xiaomi’s new sports camera.

AMBA is trading near all-time highs, just above $86 per share, with a year-to-date increase of 70%. Not surprisingly, AMBA’s price-to-earnings ratio of 55 makes this stock pretty pricey. Its price/earnings to growth ratio (PEG) of 1.7 is also pricey.

However, given the promising projected revenue growth, there are three reasons I predict AMBA stock will still go up and still worth a buy:

  1. AMBA management has shown its success in how to manage the business.  This bodes well as AMBA intensifies its hold on current markets and expands into new ones, which will maximize earnings. AMBA’s return on equity and profit margins — measurements of its operational performance —  are respectively an impressive 21.3% and 23.2%.
  2. AMBA is growing its existing markets, most notably its professional security systems. CEO Fermi Wang said that its professional IP security cameras growth was driven by China, with unit shipments doubling from the previous year.
  3. AMBA is in the drivers’ seat to capture the growing wearable body camera market. While it’s looking to profit from Obama’s $75 million proposal for police cameras, the market for wearable cameras is projected to be more than 30 million units by 2020. If AMBA can capture its expected market share in wearable cameras, those sales will accelerate AMBA’s growth.

If AMBA management can keep its hold on current markets and grow in the emerging wearable body camera markets, AMBA’s revenues will grow — and so will its stock.

As of this writing Johnny Chen did not hold any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/amba-stock-keep-an-eye-on-this-one-ambarella/.

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