Ambarella Inc. (AMBA 2.65%) got a boost after strong quarterly results were reported by its largest customer, GoPro (GPRO 0.94%), further extending its recovery after a negative short report. Some investors have been getting nervous about Ambarella’s lofty valuation, especially as the GoPro action camera market may be getting saturated or undercut by cheaper competitors.
But as we will see, AMBA has demonstrated in the past an ability to adapt and find new areas of growth. This is exactly what they appear to be doing today as they could be setting up to take advantage of exploding markets in IP security cameras, wearable cameras, and perhaps even commercial and consumer drones. This is AMBA’s greatest strength and could be a huge source of growth for the foreseeable future.
AMBA has been here before.
In AMBA’s latest 10-Q, or quarterly report, we read one of the risks is their reliance on a relatively few number of customers. This is largely due to GoPro, which analysts estimate make up over 30% of AMBA’s revenue. This is indeed a risk and should not be taken lightly. But it is also the unfortunate consequence of hitting an absolute home run -- giving AMBA its incredible performance in the first place.
In the same paragraph of the 10-Q we also read,
"In fiscal year 2010, the majority of our revenue came from the pocket video, camcorder and infrastructure markets. Over the last five years, we have continued to provide solutions for the camcorder and infrastructure markets, but also have expanded our focus to include the wearable sports, IP security and automotive aftermarket camera markets. We believe our entry into these markets will continue to facilitate revenue growth and customer diversification."
In other words, AMBA has been a one-trick pony before, largely relying on chips for video infrastructure, an industry that slowed, or hand-held cameras, which were quickly replaced by cellphones.
The fact that AMBA found ways to pivot toward higher growth areas is impressive and it appears they are doing it again. While GoPro gets all of the attention, an even larger portion of their revenue comes from IP security cameras. The video surveillance market is expected to reach almost $43 billion by 2019, a compound annual growth rate of over 19%. Further, the IP-based video surveillance market is expected to grow at an ever faster rate of 24% per year during this time, which is what AMBA specializes in.
AMBA should be one of the main beneficiaries as security camera systems continue to switch-over to digital. Further, many of these systems either stream the video feed over a network or back them up to the cloud, making video compression a top priority for these products, something Ambarella's algorithms excel at.
Wearable camera growth isn’t done.
The wearable camera market is expected to increase shipments by a compound annual growth rate of 33% through the year 2020, according to a recent market research report. While there may be an upper limit to extreme sports enthusiasts strapping cameras to their helmets, the wearable camera market has many other use cases.
As the report noted, wearable cameras are beginning to proliferate more widely in the public safety and enterprise sectors. Body cameras are being used by more police forces and hospitals and other businesses are also experimenting with them. As the cost continues to come down for these devices, it will make sense for businesses to adopt them for safety, training, data gathering and quality control.
There are also a few wildcards that could provide a boost to growth, such as AMBA's acquisition of VisLab. The adoption of car cameras could also add a bit to the bottom line, especially as backup cameras will be mandatory on all new cars in the United State by the year 2018. Finally, GoPro has been talking up their own line of drones for awhile now and may even be breaking into virtual reality.
AMBA’s “one-hit-wonder” with GoPro is somewhat of a worry, and rightly so. But it doesn’t mean the company’s growth is done. Instead, it appears to be doing exactly what you would want a small growth company to be doing -- expanding into adjacent areas where it can leverage its expertise. The market is expecting a lot from AMBA based on its valuation, but so far all lights look green for this growth stock.
