By: Steve Smith
This company stand to benefit from the explosive growth of the integration of video across multiple platforms and industries.
It’s often noted during any “gold rush”, it’s better to be selling the picks and axes than doing the prospecting. It might not be as glamorous, but we saw how this played out during the first wave of the internet.
The agnostic suppliers of gear, hosting and storage such as Cisco (CSCO), Akamai (AKAM) and EMC were big beneficiaries of the build out. Those wading into the stream or staking their claims to grab market share such as Pets.com and Webvan didn’t fare so well.
I think it’s wise to take a similar approach to investing in a video revolution that’s occurring right now. Video may not ultimately be as transformative as the “information highway” created by the internet, but it is likely to become just as ubiquitous as the adoption and application still appears to be in the early stages.
New products across several markets continue to pop up, such as personal, advertising and industrial uses.
Consider Ambarella (AMBA), a developer of systems and semiconductor solutions for hi-def video, the star behind this video revolution. As new uses from smart homes to land surveys to sports, these new products are being built on AMBA’s chips because they are the best and most-trusted on the market.
AMBA’s story and growth prospects are known, as evidenced by the stocks’ impressive 67% raise for the year to date and the lofty 49x forward p/e multiple it carries. But I think the stock can still carry higher over the next few months and the recent pullback following the 9/12 earnings report.
Shares rebounded quickly, left a bullish spike and are now holding above support at the $67-68 support level.
The sell-off makes partial sense, in that the stock had surged more than 70% from May into the Q2 ER. The company didn’t smash estimates across the board or give mind-blowing guidance, and investors are naturally profit-taking. Against the back-drop of recent hawkish Fed commentary, a market trading near all-time highs, a disappointing August jobs report, and global macroeconomic uncertainty at-large, we can understand why the stock had an influx of sellers on Friday.
But the numbers were solid enough for those with a longer term time horizon to be encourage that AMBA future looks bright and it will continue to be a star in the digital video revolution.
Ambarella reported quarterly revenue of $65.1 million, which beat consensus estimates by a slight $0.82 million and represented a 23% decline year-over-year (“YoY”), and EPS of $0.54, which beat estimates by 30% but was a $0.34 per share decrease YoY. But as GoPro and other new cycle products roll out, sales should ramp back up heading into the end of 2016. Guidance of between $95 million and $99 million was also encouraging as even the low end of that guidance would return Ambarella to YoY revenue growth, which is essential for any growth stock.
Perhaps the most surprising result was a reported non-GAAP gross margin of 67.1%, which was a substantial 180 bps increase over Q2 2016 and a massive beat of management’s Q1 guidance of margin between 60.5% and 63.5%. The ability to maintain margins speaks to AMBA’s competitive advantage and that it’s not being commoditized.
Drones, Homes and Phones
HD/UHD video capture has applications across several spaces, both personal and commercial. Indeed, much of Apple’s’ iPhone 7’s strong early sales stems from the improved camera. The leading application remains hand or mounted cameras, with drones representing the biggest near term market opportunity. Drones are being deployed by entertainment and sports, to real estate and facility monitoring, to delivery services such as Amazon.
We also see applications in the smart home, from security to baby monitoring and fitness/medical. Travel, both commercial and personal are also finding applications such as the auto industry installing dash cams.
According to management, consumer demand for 4K UHD is accelerating, and this coupled with the highly anticipated launch of the Hero 5 later this year should fuel a multi-quarter bounce-back in the sports wearable market starting in Q4. Again, because this bounce-back will be fueled by demand for higher video quality, AMBA is a particularly leveraged beneficiary.
- The home monitoring market remains in its infancy but seems to be where big companies are focused. The smart home transition seems to be accelerating as Apple (AAPL) Comcast (CMCSA), Google (GOOGL) and Amazon (AMZN) are all making pushes into the market. Importantly, these companies are utilizing AMBA in this transition.
- AMBA is also beginning to see new opportunities in the automotive market. AMBA was formerly involved almost entirely in the after-market, but now the company is starting to realize revenue for video camera recorders being offered either as a dealer fit option or an integrated option in new OEM car models. This represents a significant expansion of automotive TAM for the company, and likely indicates future.
The combination of solid fundamentals and a good technical set up has me looking to establish a bullish position.
I’m targeting the purchase of the January 67.50/77.50 Call spread for a $3.75 net debit
Here is what the risk graph looks like:
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