To say the last few days have been a tad interesting for Ambarella (AMBA) would be an understatement. They’ve been quite wild.
The price of Ambarella stock surged last week on GoPro (GPRO) announcing that future Toyota Motor (TM) Tacoma trucks will have GoPro camera mounts built into them. The encouraging quarterly report from GoPro shortly after the Toyota news fanned the bullish flames, pushing Ambarella stock to an all-time high of $129.19 last Thursday.
It wasn’t meant to last, though. The AMBA stock price has since corrected; partly on the heels of waning euphoria, but mostly on the renewed concerns of the infamous short-seller and naysayer Andrew Left of Citron Research.
On Thursday, Left updated his bearish thoughts on AMBA, and reiterated his AMBA stock price target of $90. The end result? Once again, owners of AMBA are caught in the middle.
On the one hand, Citron’s claims of Ambarella stock being overvalued do hold some water, more or less … at least from a conventional point of view. On the other hand, GoPro camera-mania seems like it’s never going to stop, and AMBA is certainly going to remain on that ride.
And as is often the case, the truth is somewhere in the middle of the two extremes.
Where Left Is Right and Wrong
In Wednesday’s update of his bearish thesis, Andrew Left explains that it’s only a matter of time before another video/chipmaker comes up with a cheaper product comparable to Ambarella’s. Simultaneously, it’s only a matter of time before another consumer technology company produces a wearable or mountable action camera to knock GoPro off of its perch.
Between the two realities, there’s more than enough of a brewing headwind to potentially dent the value of Ambarella stock.
Shareholders should be aware of that risk.
Citron’s updated take on AMBA further points out that an investment in Ambarella stock, contrary to popular belief, isn’t much of an investment in drones. Left’s latest commentary specifically points out that TV personality and market guru Jim Cramer was wrong in early June when Cramer explained:
“What really dazzled people on the (conference) call, once they started listening to it, is drones. People are underestimating drones. Ambarella is the brains behind drones.”
And, Left is correct about Ambarella not being the core of drone technology. Left directly countered, saying of Cramer’s assessment:
“This is simply factually incorrect. It would be as foolish as saying the camera is the brains that control the iPhone … Ambarella chips handle video processing and compression. They work with cameras, period.”
But, he alarmingly glossed over a significant detail on the matter.
In reality, most of the drones sold in the foreseeable probably will have some sort of camera attached. That’s good for GoPro, which so far has been the camera of choice for active people and drone enthusiasts. But it’s also beneficial to AMBA, which doesn’t have to be the centerpiece of drone technology to ride the drone wave. AMBA only has to be part of the technology.
And yes, it’s a big opportunity for anyone involved. Last year, the Consumer Electronics Association forecast non-military drone sales of 250,000 at a sum-total price tag of $84 million. That’s just in the U.S. This year, CEA is forecasting 400,000 drones will be sold, and in the next five years, drone sales will reach 1 million units per year on sales of $1 billion.
In other words, an investment in Ambarella stock is an investment in drone mania, even if it’s only a coincidental relationship.
Bottom Line for Ambarella Stock
With all of that being said, perhaps the critical detail most overlooked about Ambarella in this hullabaloo is that it’s far from a one-trick (GoPro) pony, and AMBA is actually moving further away from its customer-concentration risks.
Yes, it’s true that GoPro makes up a dangerously big piece of Ambarella’s revenue — between 35% and 40% according to FBN Securities analyst Shebly Seyrafi — but change takes time.
In the meantime, owners of Ambarella stock can take comfort in the fact that about the same amount of revenue is generated from the completely unrelated security camera arena. Moreover, FBN forecasts that this IP security segment for Ambarella will actually grow 35% next year, which is faster than its action-camera business will grow.
And yet, it’s not even the security camera market that could prove to be the most explosive piece of Ambarella’s product mix in the foreseeable future.
It’s a largely overlooked detail about AMBA stock since it’s not a key part of its revenue yet, but Ambarella makes onboard automotive cameras and chips. Although most of what it offers is aimed at the law enforcement community, a migration to the passenger vehicle market wouldn’t be a stretch.
Considering Techno Systems Research recently suggested the automotive camera market (lane change sensors, rear views, etc.) could be worth $6.6 billion by 2018 as such equipment becomes common for mid-priced and even budget cars, one has to wonder if Ambarella is already eyeing that opportunity.
So yeah, the AMBA stock price may be frothy. It may even slide down to Citron Research’s target price of $90 before it’s all said and done. But it’s a great growth story, and one that has a long future.
Don’t get too distracted by the valuation argument, as growth stocks are rarely held down for long by valuation concerns.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
