Final Boarding Call for Ambarella

This could be the final boarding call for buyers of Ambarella Inc. (Nasdaq: AMBA), a global leader in high-speed video chip technology, as the stock is approaching the top of our recommended buy range of $57 and looks ready to make its way toward the $60-plus area. 

Turnaround Proceeds

I like Ambarella’s turnaround story and profiled it in the June Issue of Breakthrough Tech Profits. It was once a high-flying stock because investors viewed it as a safer way to play GoPro. But when the latter’s shares cratered, Ambarella followed.  More bad luck resulted when an earthquake in Japan forced Sony, a major supplier to Ambarella, to close a key component factory.   But little has changed internally for the company, which remains a well-managed leader in video chip technology for drones, closed-circuit TV cameras, and is expanding its 4K high speed resolution System-on-a-Chip presence which is expanding through car cameras, sports applications, and broadcast.

Quiet Accumulation Based on Fundamentals

Since I recommended the stock money has been flowing in very quietly, with a modest gain of 4.3% based on the closing price on the recommendation date (June 16, 2016).  Slow and steady accumulation is usually a sign of institutional buying, an excellent sign for the long term investor because big mutual funds take their time getting into and out of  stocks, which supports the price.  More important, this buying pattern from institutions is based on sound fundamental research, similar to the methods that I use.  But what I like about Ambarella is that it has a leadership position in its sector based on great products and an excellent management team that tends to under promise and over deliver, a practice that tends to lead to more positive than negative surprises.

Security Looms as Potential Booster

Out of curiosity I looked at the top ten Google searches for July 17, and found that three of them were terrorism related. I then drilled down into Google’s analytics and found that interest in security drones, closed circuit security cameras – especially home security cameras – is also rising as are the number of searches of the terms home security, wireless home security and security wireless cameras.  This Google search index is by no means scientific, but it is a sign that the public and businesses are concerned about security and suggests that Ambarella’s potential gains in the intermediate term are most likely to come from investor’s realization that this is a security company.  I believe that if current trends continue Ambarella’s security-related sales are likely to rise as demand for chips used in closed circuit security cameras, drones, and home security devices, such as the Ring doorbell, which features Ambarella’s System on a Chip microprocessors, are likely to rise significantly over the next few quarters.

Buy Good Companies during Quiet Times

Ambarella is undervalued because few investors see it as a security company.  It has a P/E ratio of 31, but its five-year earnings growth rate is a stout 35% with a nearly 88% five year growth rate of cash flow growth and a 19% return on equity.  Insiders are also buying the stock with ten insiders buying and five selling with a net total of 18,408 shares being scooped up.  The sellers have been exercising shares for personal financial reasons according to the filings.

 A 4% gain may seem small to some investors over a month, but it’s always best to build a long term position in a good company’s stock when things seem quiet, especially if the company is on solid footing and the times are moving to a place where the company could benefit.  The buy limit for Ambarella is $57, which means that investors still have some room to enter the stock.  In my opinion the security angle for Ambarella has yet to be discovered by many investors who still see it as a play on GoPro.  That time has passed and Ambarella is now a security company.    As more investors understand this dynamic, the price of the stock is more likely to rise than fall.  The next stop is more likely $60 than $50. 

Disclosure:  Dr. Duarte owns shares in Ambarella.

Portfolio Summary

Recent Changes:

SOLD – McKesson McKesson January 19, 2018 195 LEAPS Call option (MCK_011918C195) – Bought May 26, 2016 – Sold July 15, 2016 for a 42.3% gain.

SOLD – White Wave Foods Company (WWAV) – Bought 3/21/16 at $40.64. 7/07/2016 Sold at $56.25 after company received buyout offer from DANONE Group. Total Return +38.3%.

 

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