Best Stocks for 2015: Ambarella Takes the Lead

Sometimes you get lucky.  Sometimes your view of the current consumer and business environment, and where it is going, meets up with the right company — and that company has great management, and great vision, and isn’t too expensive.

10BEST2015_185x185Sometimes you get there early, and you get to watch with amusement as it gets bid up, becoming a momentum stock and attracting all kinds of opprobrium from latecomers who think it is overdone, and yet you know the stock is special; it has that special sauce that separates the will-be stocks from the coulda, woulda, shoulda.

I’ve been snapping my fingers about Ambarella (AMBA), the maker of high-definition video chipset and compression software, since December, and I’ve had my eye on it even longer. Shares have more than tripled since last May, and AMBA stock is up a clean 100% this year alone, but the great news is that you didn’t miss the boat. Now is the perfect time to jump in.

After reporting outstanding quarterly results in early June, shares subsequently climbed 37% in the following couple of weeks, closing as high at $126.70. Then the rug was pulled from under it, with an equally dramatic 25% hair cut the very next week off no pertinent company news.

Looking Beyond the Recent AMBA Stock Pullback

So what caused the precipitous drop in AMBA shares? A couple of research reports citing the firm’s high valuation, including a report from Citron Research that compared Ambarella’s rise to the “ridiculousness” of the recent bubble in 3D printing stocks.

Understandably, it can be difficult to justify further growth in a company’s whose shares have risen triple digits in less than a year, but that’s the beauty of a young growth company like Ambarella — it’s still in the very early growth stages, with a market cap that is barely out of diapers, at $3.1 billion.

Founded in 2004, AMBA 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.

To quickly see why I like the company so much, let’s take a look at its most recent quarter results. Earnings of 71 cents per share blew past the 59 cents expected by the street, while Ambarella was able to grow revenues by 74% year-over-year, with strong sales in all its camera markets, including IP camera, wearables, and automotive dash cameras.


As much as we love the IP and wearables camera segments, the automotive sector is what has us most excited. Garmin recently announced its movie cam, an all-in-one dash cam utilizing Ambarella’s A7LA camera that continuously records and saves files on accident impact, providing secure footage of when and where accidents happen. It also integrates full collision warning and lane departure warning driver assistance.

The continued penetration into the automobile OEM sector will be the big game changer that separates AMBA from many of its competitors. Earlier this week, the company announced it had acquired Italian company VisLab, a developer of autonomous vehicle technology for $30 million.

Although the acquisition is expected to begin contributing to top-line growth immediately, the big coup in the deal is the acquisition of the talent behind the company. According to Lux Research, the market for self-driving vehicles is estimated to exceed $87 billion by 2030, and Ambarella’s technologies are expected to be at the center of that growth.

In addition to strong quarterly sales, AMBA posted gross margins of 65% while guiding for second-quarter revenues of $79 million to $83 million, well ahead of the $68 million expected by analysts.

Not to sound like a broken record every three months, but to sum things up, it was another great quarter for AMBA, posting outstanding growth in nearly every sales and operational channel it competes in.

Bottom Line for AMBA Stock

Let’s go back to this so-called lofty valuation.

When I wrote about Ambarella last December, the stock was trading at nearly 40x forward earnings, then shares spent the next six months doubling. AMBA stock is now a bargain, trading at a just 27.7x next year’s earnings. Bear in mind, these are the same consensus analyst earnings estimates that the company continues to exceed every quarter.

It’s not often you get to buy a young technology company with this type of explosive growth at such a reasonable price. Ambarella fits the bill, and the recent dip has presented an opportunity that’s hard to ignore.

Jon Markman 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.

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