Editor’s note: This column is part of our Best Stocks for 2015 contest. Jon Markman’s pick for the contest is Ambarella Inc (AMBA).
It might seem gutsy to believe Ambarella Inc (AMBA), a stock that is up nearly 60% this year, will be one of the best stocks of 2015, but that’s exactly what I expect out of this under-the-radar gem.
Ambarella was founded in 2004 and is one of the world’s leading developers of low-power, high-definition video compression and image processing solutions. Its components are used in a multitude of HD and new Ultra HD cameras, including security IP cameras, sports cameras, drones, wearable cameras and automotive video recorders.
For those of you that have heard of Ambarella, there’s a good chance its because of it’s biggest client, GoPro Inc (GPRO), the maker of the exciting and high profile mountable and wearable cameras and accessories. Ambarella’s chips are utilized inside many of GoPro’s products, and GPRO currently account for more than a quarter of AMBA’s revenues. Despite a recent pullback, GPRO stock has more than doubled this year, and the success of the GoPro market is unquestionable.
So why not just own GPRO? After all, it gets all the fanfare and trades with three times the average daily volume of its chip supplier.
But Ambarella is so much more than the chips it supplies to GoPro.
Ambarella Is a Winner in Many Markets
About 45% of Ambarella’s business is in the Internet-connected security market, addressing needs in the home, business, government agency, and airport segments. Additionally, Ambarella is counting on explosive growth from customers such as Flir Systems (FLIR), which announced 31 new IP security camera models this year, all with Ambarella chips inside.
Although the headlines often focus on the Ambarella chips that are utilized in the popular wearable cameras, keep in mind that AMBA is a leader in the television broadcast market as well. Its chips are used in transcoders and video contribution systems.
For example, it’s a constant challenge for television service providers to provide high-quality HD within the increasingly limited bandwidth available. That’s where AMBA and its Ambacast 8000 system come into play. The technology allows networks to shoot television broadcasts with HD cameras, then compress the signal in an efficient manner to travel over cable or Internet before being decoded.
With more channels competing for this limited bandwidth — along with the next-generation in video technology, 4k video, on the horizon — the need for quality compression technology will only rise. The big differentiator for AMBA isn’t just the fact that it enables high-quality video and efficient compression of that video, but that it does so using the least amount of power.
Revenue jumped 43% year-over-year in the most recent quarter, hitting $65.7 million. Additionally, net income doubled from 2013 during the quarter. AMBA now expects fourth-quarter revenue to be between $57 million and $60 million, well past the $51.2 million analysts expect.
Overall, it was another great quarter for Ambarella, experiencing growth in nearly all operational and sales channels, including its chips for wearable cameras, IP security cameras and quadcopter drones, the automotive aftermarket segment. And the company expects to play a big role in “cop cameras,” should they be mandated by police departments. The future remains bright, and its increased outlook on sales for next quarter reflects that.
So let GoPro cameras garner all the headlines, while we profit from the little AMBA chip inside those cameras and a host of other applications.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
