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Ambarella Inc (AMBA): An IPO on Course for a Price Treble

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A year has yet to pass, but for some stocks enough time has passed to double their share price, and continue to set up for a three bagger. Ambarella Inc (NASDAQ:AMBA) made its debut on the markets in October 2012 in what was a disappointing start for the stock; the $9-11 expectations turned into a $6 stock. But since November, investors have taken notice, bidding the stock into the teens before easing back around $14 a share.

The company designs chips which support Ultra High Definition (UHD) resolution and has finished with a positive net income in the $9.9-18.2 million range for four of the last five years. However, it has grown revenue threefold over the same five year period, with a 25% jump for 2013. March earnings gave the stock a foothold which has enabled its current advance.

The major contributor to fiscal 2013 growth was its IP security camera business, with China an important customer in this field. In the Chinese market there was a general migration/upgrade from analog to digital cameras, including good demand for cameras supporting its UHD resolution.

In terms of new products, the company is feeding into the rapid growth of sport cameras (replacing traditional camcorders), including wearable cameras. The company released its new A9 Ultra HD 4K system-on-chip at CES in January, to generally positive feedback. But this was another key sector driving earnings, and is expected to continue into 2013.

Camera revenue accounted for 83% of Q4 results, compared to 70% the year before. The percentage increase related to a drop in “infrastructure” revenue – skewing the relative performance of the camera segment. This disparity is likely to increase as a key customer was bought out, introducing uncertainty into future sales to this company. Ambarella Inc (NASDAQ:AMBA) has two key customers: WT Microelectronics is its major logistics partner for sales and distribution and accounted for over half of revenue, while Chicony accounted for 16% of annual revenue and 30% of last quarter’s revenue. WT and Chicony were the company’s only “10% customers,” but in reality are the only customers for Ambarella. This introduces some uncertainty, and leaves it vulnerable if it’s unable to maximize sales through its existing distribution channels. Although by directly dealing with Chicony, Ambarella Inc (NASDAQ:AMBA) have reduced some of the commission payments made to WT Microelectronics (who Chicony previously bought from).

Not surprisingly, camera sales are expected to be 84-88% of Q1 revenues, up from 67% in the prior quarter. Infrastructure is expected to again suffer in Q1. However, with gross margins in the 60% range it operates with plenty of wiggle room. Better still, it’s the high end scale where sales are most robust – although the company is in the early manufacturing stage for a new chip directed at the low end of the market which should offer good profit margins. It also expects costs to fall for some of its pricier sports cameras, which will shift the margin dynamic through to 2014.

Competition

There are a number of private manufacturers, mostly located in Asia, building security cameras. Broadening the picture to include semiconductors, brings in public companies Fujitsu LimitedIntel Corporation (NASDAQ:INTC), and Texas Instruments Incorporated (NASDAQ:TXN).

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