Ambarella’s (AMBA, Financial) stellar run came to an end when Citron Research came out with a report calling the company grossly overvalued at setting a $40 18-month price target. Citron has been pretty successful with its calls in the past and accurately predicted the downfall of the whole 3D printing industry. In its latest report, Citron even compared Ambarella’s increasing valuation to the 3D printing bubble.
While Citron may have a good record, I think the firm got in wrong this time. Ambarella has lost close to 20% of its value since the report came out. And although the company is up close to 100% YTD, I think investors should take advantage of this pullback and buy the stock.
3D Systems and Ambarella are not the same
Citron compared Ambarella to 3D Systems (DDD, Financial), but I think the comparison is flawed. Unlike 3D Systems, Ambarella is growing organically and has profits to show for it. This is exactly why the company has been delivering stunning quarterly reports. In addition, Ambarella’s guidance for the upcoming quarter is also high, which shows that the company doesn’t expect growth to slow down any time soon.
Also, Ambarella is the leader in a winner-take all industry while 3D printing space was very competitive. Ambarella doesn’t have many competitors that can dethrone its place as the market leader. By comparison, 3D Systems had Stratasys, Voxeljet, ExOne and other private companies. Ambarella may be a volatile stock, however it is definitely not as overpriced as 3D printing stocks. The company trades at 28x forward earnings and is a good buy at present levels.
Growth prospects are strong
As per a recent report, security camera market will reach $42 billion in valuation by 2019, growing at a CAGR of 19.1% from 2013 to 2019. Ambarella derives a major portion of its revenue from security camera and looks well positioned to benefit from this trend.
At the April ISC U.S. Security Conference and Exposition, many of the world's leading camera makers demonstrated 4K or Ultra HD cameras based on Ambarella's H2 SoC. Ambarella also demonstrated its new H3 camera SoC, the first to support the new H.265 video standard at 4K or ultra HD resolution.
Also during the show, Ambarella announced availability of its H2LM-based battery-powered IP camera reference design. The reference design enables fast developments of a new generation of a small, high-quality, battery-powered, full HD security cameras, suitable for both professional and home monitoring security locations. The reference design enables cameras that can start recording full HD 1080p30 video in less than 0.5 seconds from wake-up, and provide up to six months of battery life.
Conclusion
Ambarella is surely a high-risk, high-reward investment, however I think the stock is attractive after the pullback. The stock is definitely not overvalued and comparing it with 3D printing is irrational. The stock trades at a mere 28x forward earnings and has strong growth drivers. So, I think opportunistic investors with appetite for risk should add this stock to their portfolios.
