Does Ambarella Belong in My Portfolio?

First of all I need to scold myself for not doing a write-up on a company for well over a month. I’ve been busy, but I’m here now. So, Ambarella, Inc., (NASDAQ: AMBA) what do they do?

Ambarella develops semiconductors geared toward video applications. They are mainly know for being associated with their biggest customer, GoPro Inc., (NASDAQ: GPRO) maker of the popular action cameras all the kids are into these days. You know, those videos of teens on skateboards jumping onto a railing and then off again, successfully? (Yeah, me neither, the ‘fail’ compilations are much more amusing.) Skydivers, water rapids enthusiasts, surfers, people you see with cameras affixed to helmets, yep, that’s pretty much all GoPro, and Ambarella is working in the background of each one.

Now I work in a bar at night, and on a computer by day, so I don’t have much use for a GoPro. Drinking and researching stocks isn’t really something I feel the need to record, but other people actually go out and do stuff; this market is huge. But that’s not the only pot on the stove for Ambarella. They also make chips that go into security cameras for consumers and security service providers such as Comcast Corporation (NASDQA: CMCSA). Another branch of this business is wearable cameras for police and other first responders. TASER International (NASDAQ: TASR) is introducing a new body camera built around an Ambarella chip that will be available in Q4 2015. Ambarella’s security business is growing.

Ambarella also makes chips for aftermarket dash-cams in cars, a market that is growing in Asia. Ambarella has close ties to China and Taiwan, with most of their employees in those two countries, and a good portion of their sales tied to Asia. Of course with everyone worried about an economic slowdown in China, that scares some investors.

Now let’s talk about two much more interesting markets. First of all, drones. In Ambarella’s Q1 call on June 2nd, they predicted that over 10% of Q2’s revenues would come from drones. In the Q2 call, on September 1st, they confirmed it. Drones are big, and what are they used for? Video! Yep, slap a camera on them, and they can do amazing things, especially with the use of video analytics. (More on that later.)

Another market is OEM (original equipment manufacturer) for auto manufactures. E-mirrors, advanced driver assistance systems, automatic breaking, etc. From what I can tell, Ambarella hasn’t really broken into this market fully. This would be selling chips and equipment directly to auto manufactures for instillation in new cars. These kinds of systems don’t just need great cameras with HD resolution, they need advanced video analytics.

What is video analytics? Well, it’s algorithms that take that video data, and… do stuff with it. You know, collision avoidance, lane change assistance, etc. So say a camera sees a car coming at you. Then what? The system has to interpret the video data, know what’s happening, and know what to do to avoid the problem. So… algorithms, and stuff. (Ok, I’m getting a little out of my depth here from a technical standpoint, but bear with me.)

In July, Ambarella acquired VisLab, a video analytics firm in Italy. While Ambarella was certainly no stranger to video analytics before this acquisition, VisLab greatly strengthens Ambarella’s portfolio in this important area. VisLab’s most visible achievement was ‘porter’, an autonomous vehicle that made a trip from Italy to China in 2010. A 13,000 km trip, achieved by cameras, algorithms, and video analytics. While autonomous cars are all the rage when investors think of the future, think about the more immediate possibilities here for Ambarella. This acquisition should help them break further into the OEM market mentioned above. And I’ll bet a lot of the intellectual property from VisLab will translate well into the Drone market. Autonomous drones?

So of course I’m interested in Ambarella because the stock has fallen on hard times. It’s what I do. So why has Ambarella fallen from nearly $130 in July, to just over $54, where it closed Friday, October 23rd. (I’m writing this in the wee hours before the market opens on Monday) Well, the first leg of the fall seems to be because of a negative report put out by Citron Research, saying that the company was way overvalued compared to its peers, calling for a MUCH lower stock price. (Well, mission accomplished.)

The decline continued for months, with many pointing to Ambarella’s Q2 conference call as further reason. Management stated that Q3 wearable camera (GoPro mainly) sales would be down, both year over year, and sequentially. The stock was around $90 when this call happened. Management didn’t see this as a huge problem, and blamed it on a different timing of new product releases this year than last year, and that the average of the two quarters should fall in line with their previous growth expectations. The REAL problem, in my opinion, is the company’s reliance on GoPro as a customer. When investors think Ambarella, they think GoPro. Any perceived negativity, justified or not, around GoPro is HORRIBLE for Ambarella’s stock price.

I believe that Ambarella has growth opportunities in other areas, and while this specific market may or may not see some softness over the next several quarters, I see this as a buying opportunity. Call me crazy.

Competition from other big name chip makers is also a cause for concern, as getting into these growth industries would be very attractive for them. I feel that Ambarella has a significant lead in chips for these video applications, and can maintain that leadership.

So where does that leave me? GoPro releases earnings on Wednesday, October 28th, just a couple of days away. GoPro has been in sharp decline lately too (not interested in it, by the way. I don’t believe GoPro can grow into a media company, but who knows?), and I expect their earnings to move Ambarella’s stock, one way or the other. If Ambarella sells off sharply before or after GoPro earnings, I expect to be a buyer. Maybe I can get some in the $40’s?

As always, feel free to look at my portfolio and see how I’m doing. And please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender