Ambarella Inc. (AMBA, Financial) disappointed shareholders in 2016 as the stock was down nearly 3%. Moreover, the stock is flat heading into 2017 as it is up nearly 1% year to date. A few years ago, the action camera chip supplier was heavily dependent on GoPro (GPRO) as it generated almost 50% of its overall revenue.
The company has now significantly reduced its dependence on GoPro and anticipates generating around 20% of its overall revenue from them in fiscal 2018. Instead, the company is progressively investing its capital in other end markets like self-driving cars.
Ambarella reported better-than-expected fourth-quarter results in February. The company reported earnings per share of 92 cents, surpassing the estimates by 18 cents.
Revenue came in at $87.5 million, again surpassing estimates by $1.43 million. Furthermore, that figure represents a 29% surge compared to just 5% in the year-ago quarter. The company’s impressive revenue growth was mainly due to the rapidly growing home monitoring and drone markets.
Furthermore, the company’s non-GAAP gross margin for the quarter was 67.2%, up considerably from 64.1% in the same quarter of the previous fiscal year. Despite ongoing issues with GoPro, the company has managed to remain highly profitable.
Moving ahead, in original equipment manufacturer (OEM) automotive markets, the need for advanced driver assistance systems (ADAS) is a substantial opportunity going forward. As per a forecast report from marketsandmarkets.com, the worldwide ADAS market is projected to grow to $42.40 billion by 2020, representing a compound annual growth rate (CAGR) of nearly 11% between 2016 and 2021.
ADAS requires the combination of advanced image processing with powerful computer vision processing. Ambarella has been belligerently capitalizing on the development of advanced computer vision technology. Recently, the company introduced its first computer-driven chip.
Apart from this, the chip manufacturer also introduced its new H3 system-on-a-chip (SoC), designed to power virtual reality (VR) cameras. Its new chip is capable of providing 4K Ultra HD at 120 frames per second as well as 8K Ultra HD at 30 frames per second. Although the VR market is still at an early stage, it is projected to grow at a sturdy rate in the imminent year.
As an outcome, Ambarella looks well positioned to benefit from the VR market in the future.
Summing up
Although 2016 was almost a flat year for Ambarella, the stock looks set to move upward at a healthy rate in the imminent years. Furthermore, the company is moving in the right direction by diversifying itself away from GoPro as it will allow it to tap into several other growth markets.
The company, however, is still dependent on GoPro as well as other action camera manufacturers, which could spell trouble in the long run. Furthermore, its drone SoCs may not become popular enough to become a major revenue stream in the near future.
On the other hand, Ambarella trades with a price-earnings ratio of almost 33, suggesting it is expensive at its current market price. As a result, investors looking to initiate a position in the stock should wait for a better entry point.
Disclosure: No position in the stocks mentioned in this article.
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