After trading in a tight range between $50 and $60, investors are growing bullish on Ambarella (NASDAQ:AMBA) ahead of its earnings report on December 3 after market close. Despite dropping by more than half from its peak, Ambarella’s stock is up 15 percent overall this year. Chances are good that the company will hold a bullish outlook thanks to three things. First, Xiaomi only started ramping up Ambarella’s new camera. Second, the company has new technology launching for the professional and consumer IP security camera market. The segment also will benefit from the holiday season. Third, growth in the automotive market is solid, especially in China.
Even though GoPro (NASDAQ:GPRO) reported weak quarterly results and issued a disappointing outlook, Ambarella did not warn investors its upcoming third quarter report would disappoint. The company forecast revenue growth of between 37 percent and 42 percent year-over-year in September. It expects success for the S2L chip for the IP security market. This chip integrates a 4K Ultra HD H.264 encoder with an ARM (NASDAQ:ARMH) Cortex-A9 processor. The solution offers its customers a wide lens and captures at low bitrates but high-resolution. This gives the S2L chip a competitive advantage of lower storage and network bandwidth requirements.
Revenue in the IP security segment may still come in weaker than expected. Ambarella adjusted its inventory last quarter due to one of its big customers. Customers may not to increase supply for the holiday season, which would disappoint investors.
Weak GoPro sales already expected
Ambarella already anticipates a drop in wearable camera revenue. One significant reason for this is an inventory build happened in Q2 as Xiaomi and GoPro both shifted their new product shipments a quarter earlier. The company’s gross margin will still be as high as 64 percent, thanks to growing demand for drones and steady growth in automotive.
Last quarter, customers already ramped up on many new drone models. If design wins moderate, sales here may disappoint. Still, Ambarella is working on many more design wins, which ensures continued revenue strength for drones.
Looking beyond the current quarter, the company is developing solutions on 14 nanometer. The technology in drone improvement is a function of video quality and battery life. Ambarella is well positioned leading the market through ongoing research activities.
Solid moat in processors
Ambarella does not face any significant competition from chip suppliers, be it Nvidia (NASDAQ:NVDA), Intel (NASDAQ:INTC) or Qualcomm (NASDAQ:QCOM). Ambarella offers the ideal solution in delivering high quality images that are compressed efficiently. Conversely, Intel dominates in the computing market, while Qualcomm’s main business is in smartphone processors. Entering the drone market would push these firms beyond their core competency. Even so, Ambarella is maintaining its firm lead in R&D. Its headcount grew by 13 percent last quarter. The company allocated 83 percent of its staff to engineering.
At a recent price of around $58, Ambarella trades at a P/E of 25 and a forward P/E of 16.55. Its P/FCF is similar to that of GoPro (at 20.7 times), yet Ambarella is a more diversified firm. Ambarella’s EBIT margin is twice that of GoPro:
If management raises guidance in light of a stronger holiday demand, the stock will continue its rebound.
Ambarella’s minimum revenue growth is 40 percent in the third quarter. It has a diversified product line, all of which are performing reasonably well. The company already expects a drop in the wearable market. Demand from China is especially strong. Ambarella offers the best available technology for popular products in drones, IP security and wearables.
For more information: https://seekingalpha.com/article/3704706-ambarella-earnings-preview
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