Ambarella (AMBA, Financial) has been outperforming the market by over ten times and in my last piece I held a bullish take on the stock. It is an example of a great growth story with the stock moving up from $6 to over 17X that value in around two years time. The company posted estimate-beating first-quarter fiscal 2016 results and hit a new 52-week high of $104.12 and is currently trading close to its 52-week high. The stock is trading above 200-day SMA, representing bullish outlook. Can the momentum be sustained? Let’s take a look.
First-quarter results
The sales remained stable in professional IP cameras, wearable and automotive dash cameras and Ambarella continued to make progress in new markets for monitoring cameras and drones or flying cameras. Market leading players like Hikvision and Dahua fueled growth in the professional IP security camera sales. On the other hand, automotive market revenues continued the positive trend on the back of demands from customers in China and Korea.
Consolidated sales jumped a whopping 73.5% year-over-year to $71 million with camera market revenue expected to be around 96% versus 90% in the year-ago quarter. Analysts were expecting revenues of $3.65 million less.
Gross margin expanded 210 basis points, or bps, year-over-year to 64.8%, backed by favorable product mix due to solid demand for high margin A7L SoC in the automotive aftermarket and wearable camera markets.
On the back of estimate-beating top-line performance and margin expansion, net income came in at $23.7 million or $0.71 per diluted share versus $7.8 million or $0.25 per diluted share in the year-ago quarter. Analysts’ estimate was $0.12 lower.
Ambarella exited the first quarter with cash and marketable securities of $235.2 million, adding $24.8 million of cash from operations in the quarter. The balance sheet carried zero debt.
Drones to drive growth
The commercial application for drones was popularized by Jeff Bezos when he announced that Amazon was testing the idea of delivering packages via drones. It is predicted that commercial applications for drones will quickly ramp up over the next ten years, particularly after 2020. According to a report published by Marketsan d Markets, the Multirotor drones market is estimated to be valued at $840.21 million in 2015. This is projected to witness a compound annual growth rate of 22.2% to reach $2.28 billion by 2020. Going forward, this represents a huge growth driver for Ambarella.
It is not surprising that Ambarella reported significantly increased activity in its A9 camera SoC family, which is used for flying camera or drone application. Also, for the second-quarter fiscal 2016, the company is projecting that for the first time the drone-related video processor sales will account for around 10% of revenue.
Ambarella’s top-client GoPro (GPRO) is also planning to launch a drone in the first half of 2016.
IP Cameras will hit a vision wall
The upgrade cycles in professional IP cameras from 480 pixels to 720 pixels, and from analog to digital, have been panning out well for Ambarella’s sales in this segment. However, human eyes can only see so many pixels per square inch and after a given number any further upgrades will become meaningless and expensive.
I put this figure at 1080 pixel resolution and beyond that I don’t see any reason for customers upgrading to 4K cameras unless the price drops sharply. So, Ambarella will indeed hit a biological vision wall in this segment. While the market in this segment will still continue to grow, but average selling price, or ASP, will continue to fall, more so as more competitors move in. Ambarella acknowledges this reality too.
Action cameras
GoPro accounts for about one-third of Ambarella’s revenue. This isn’t a good sign as GoPro can choose to switch vendors when a comparable technology at lower prices is available in the market. Pricing and margin pressures will creep in, and this will impact both top- and bottom-line of the company. Action camera prices have already+fallen+to+%2450+level+for+1080px and going forward this will affect margins as ASP falls.
Xiaomi’s win as a client will be a buffer, but the market will decide declining ASP. Even Xiaomi is selling its action cameras for $80 currently. Additionally, the same stagnation that I talked of in IP security camera market will also play out in this segment, going forward.
Final words
Ambarella has grown at a fiery pace, and the stock has gained close to 100% year-to-date, and a lot of future growth has already been priced into the stock. However, the Street is slightly bullish on the stock, with seven out of 13 recommending a buy while the rest recommends a hold. At forward P/E of over 28, I am not too sure of Ambarella being a takeover target though there’s a chatter about Qualcomm (QCOM) being a potential buyer.
Also, insiders have been selling shares like hot cake. A probable loss of GoPro as a client will send the stock price spiraling down. So, at the current price and valuations, it is better to watch from sidelines, and if you have Ambarella in your portfolio, time to book some profits.
