Technology stocks overall have been a disappointment this year, finishing the first quarter of 2015 as flat as the back of a semiconductor. But there have been pockets of strength, mostly in the realms of cyber-security, surveillance and merger candidates.
Coming in twelfth for the quarter among all tech stocks over $300 million in market cap is Ambarella Inc (NASDAQ:AMBA), a little known maker of high-definition video chips I suggested back in late December. So far so good, as it is up 43% for the year-to-date, good enough for second place in the Best Stocks for 2015 competition.
Ambarella is mostly recognized by tech insiders as the company that has made the wildly popular GoPro Inc (NASDAQ:GPRO) sports camera so successful. Ambarella is the sole supplier of chips to GoPro, allowing the cameras to shoot exquisitely detailed video without sucking up much power, and also to compress and transmit those images over cellular or wi-fi networks at blinding speed.
Yet Ambarella is so much more than a GoPro vendor. It is an extremely diversified company with numerous growth opportunities well beyond the extreme sports community — hidden talents that will help fend off the commoditization that tends to afflicts chip companies. Its low-power, high-definition video compression and image processing solutions are also used in network-attached security cameras, drones, wearable cameras and automotive cameras.
Let’s take a look at what AMBA stock has been up to the past few months.
In Ambarella’s fourth quarter, revenues jumped 62% from a year ago and net income climbed a whopping 176%. And that’s with GoPro, the firm’s biggest customer now representing less than half of its revenues.
Additionally, while GoPro shares have stumbled as of late due to increased competition, the opposite is true of AMBA stock, which is benefiting from new entrants in the camera market.
A great example is the recent announcement by Chinese smartphone maker Xiaomi, which launched a new wearable action camera. The new product offering is very similar to GoPro’s flagship product, but is available at half the price. The Xiaomi camera includes an integrated Ambarella A7LS high performance processor.
What’s interesting is that, even though Xiaomi charges end users much less than competitors, it still pays full price for Ambarella’s contributions because there is has a massive lead in technology over its rivals. It’s always great when you find a company that is a margin-taker instead of a margin-giver.
The company’s president and chief executive, Fermi Wang, has been making the rounds recently, touting some of the new products in the pipeline. At this year’s Consumer Electronics Show — one of the world’s largest consumer electronics and technology trade shows — he talked about electronic mirror solutions for the automotive market.
The electronic mirror is designed to replace traditional automobile rear view and side mirrors with external cameras and an LCD display. The idea is to provide drivers with better visibility and a wider rear view, even in low-light environments. If it’s difficult to imagine your car with no side mirrors, then we won’t even discuss the company’s contributions to the development of driverless automotive technology.
Many analysts that follow AMBA stock believe that continued penetration into the OEM automobile sector will be a huge game in the coming years. Over the last year, GoPro has represented about 45% of Ambarella’s sales, but that number is expected to shrink considerably as all the other channels in which its chips are being utilized continue to grow.
Wang noted that the outstanding quarter was due to steady expansion of product offerings in not only the core markets, but in the new-technology segments as well. Some of the fastest-growing focus areas of Ambarella are in self-driving cars, drones and facial recognition.
Bottom Line for AMBA Stock
As you can see, the company is far from a one-trick pony, and investors have been rewarded, even as GPRO shares have faltered. AMBA stock has added 50% to its market cap this year as every segment of its operation is growing. You may hate the idea of a “surveillance state” as I do, but this is at least one way to profit from this megatrend.
AMBA stock is trading north of 47 times earnings, which certainly doesn’t scream value. However, considering that earnings have grown at an annual clip of 51.7% the past three years, you could certainly argue there’s still plenty of value to unlock.
The most recent quarter brought with it a slew of analyst upgrades and price target increases, but with so many forward-thinking technologies in the pipeline, I expect AMBA stock’s success to continue for the foreseeable future.
Jon Markman operates the investment firm Markman Capital Insights. He also writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. . Check out his Top Stock for 2012 here.
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