AMBA ($16.17)THE NEXT BIG THING | Updated: 04-Jun-13 |
Ambarella (AMBA) Earnings Preview:Quality Fundamentals & Track Record of Beats, But Risks Still High
After the close tonight, Ambarella (AMBA) is scheduled to release its fiscal Q1 results with a conference call to follow at 5:00 pm ET. Following its dreadful pricing on October 10, 2012 ($6 vs. $9-$11), AMBA has dramatically turned the tables to become one of the top-performing IPOs of the past year, up 160% versus its IPO price. Its success and strong growth has largely been fueled by the growing popularity of wearable sports cameras -- namely, the "GoPro" camera -- in which its semiconductors enable high-end HD video capture. More recently, however, it has gained traction in auto and video security industries, especially in emerging Asian Pacific markets. With this momentum behind it, AMBA surpassed analysts' expectations in its first two quarterly reports, which has also propelled the stock higher.
For tonight, it will need another upside report to keep the momentum going, and as we discuss below, the table may be set for it to do just that. We continue to like the stock heading into the print tonight from a fundamental perspective, but the risks are high. Given how this stock tends to move rapidly, investors and traders could be in for a wild ride. A miss would likely send the stock tumbling lower in short order, and vice versa.
Whats Expected
For its fiscal Q1, AMBA is expected to report EPS of $0.13 on revenue of $31.89 million, which would represent year/year topline growth of 23%. This is one of its seasonally softer quarters, with fiscal Q3 being the strongest ahead of the holiday season.
During its Q4 conference call, it guided for Q1 revenue of $31-$33 million, of which about 84% will be derived from camera-related products -- a big jump from the 67% in the year-ago period. Recall that in its Infrastructure segment, AMBA also develops chips and technology that is used in television broadcasting. As AMBA continues to focus on varying camera markets (wearable sports, automotive, security), this business has steadily declined as a percentage of revenue.
During its Q4 call, AMBA also guided for Non-GAAP net income of $3.5-$5.0 million, with fully diluted shares outstanding of 28.7 million. This would pencil out to an EPS range of $0.12-$0.17, or about $0.15 at the mid-point. It is interesting that the Street's EPS estimate is at the low-end of its Q1 guidance, especially since it beat the EPS number by $0.06 in Q3 and $0.05 in Q4. This could simply be a case of analysts setting a low bar to hurdle, and could set up well for AMBA again beating EPS estimates.
Those that follow AMBA realize that its gross margin has been declining, but this is basically by design, and is a function of its strategy to focus on building its camera-related business. The trade-off is to build on its market leading position in a fast growing wearable sports market and gain traction in auto and security markets overseas, at the expense of its gross margin falling from about the 70% levels in 2011 to the current low-to-mid 60% range. Last quarter, gross margin came in at 63.3%.
In regards to guidance, AMBA will likely provide Q2 revenue guidance during the call, and perhaps Q2 Non-GAAP net income guidance as well. For Q2, analysts currently are forecasting revenue of $34.72 million, equating to year/year growth of 24%, consistent with its recent topline growth rates.
Recent Earnings History
Since going public, AMBA has reported earnings twice, and on both occasions, it topped the EPS and revenue expectations. Its initial report came on December 5 when it reported EPS of $0.31, good for a six cent beat, with revenue up 24% year/year to $35.7 million versus the $34.3 million consensus. The stock was pretty volatile the following day, swinging from a high of $9.58 to a low of $8.60, ultimately closing at $9.08, up 1% for the day. Although the report didn't immediately cause a strong upward reaction in the stock, it did spark a run over the next month or so, with AMBA gaining nearly 50%.
Following its Q4 report, the stock did have a much more pronounced reaction, as the name was more familiar to traders and investors by this time. Its strong Q4 report also solidified it as a legitimate growth story in the eyes of more traders. Specifically, EPS came in at $0.18, five cents better than the $0.13 estimate, as revenue rose 28% to $31.5 million vs. the $29.2 million consensus. What was especially impressive was that its revenue growth rate was its best performance in recent history (1Q12: +20% ... 2Q12: +26% ... 3Q12: +24% ... 4Q12: +28%).
AMBA also issued upside Q2 revenue during its conference call and net income guidance that suggested upside EPS guidance as well. Following the beat-and-raise quarter, AMBA shares gapped higher at the open on March 8, shooting higher by 14% on the day.
Key Topics
When discussing AMBA, the topic that frequently comes up is its exposure to the wearable sports camera markets -- in particular, its leading position in the market via its placement in the popular GoPro wearable cameras. Without question, this has been a major catalyst for its business and its stock. And, it is looking to build upon its strong hold on the market through new product introductions. During the Q4 conference call, management spoke about how its chips are now included in iON's "The Game" action camera, which features W-Fi connectivity and the camera enables hands-free, remote recording of activity. So, the wearable sports camera market figures to remain its "bread and butter" for the time being.
With that said, AMBA is clearly making a concerted effort to diversify into other verticals. In fact, during its Q4 call, AMBA seemed to spend more time discussing its activities in the IP security and automotive markets. For the IP security market, AMBA stated that these products were a significant driver of revenue growth and stronger-than-expected gross margin in FY13, driven mainly by strong demand in China. Expanding in China will be a core strategy going forward as that country continues to migrate away from standard analog definition to digital IP-based high def cameras.
Automotive is the other key growth driver. In this market, AMBA provides chips for windshield-mounted camera recorders. This is a particularly strong market in countries such as China, Korea, Taiwan, and Russia. This is an area where AMBA sees a lot of potential because the overall market is growing rapidly and customers are migrating from standard definition to high-definition products.
Considering that AMBA's exposure to the wearable sports camera market is already fairly well known and understood, we would again expect it to spend a majority of time going over what it sees as its next growth catalysts: namely, IP security and automotive, in emerging economies.
Conclusion
AMBA's Q1 is one of its seasonally slower quarters, so its sequential revenue growth rate isn't going to look overly impressive (inline would be +1%). However, its revenue growth on a year/year basis continues to be remarkably consistent, in the mid-20%, as we pointed out above in the "Recent Earnings History" section. Furthermore, analysts' Q1 expectations may set up nicely for AMBA. Current consensus for revenue of $31.89 million is slightly below the mid-point of AMBA's guidance of $31-$33 million, and last quarter, AMBA topped its own revenue guidance, reporting revs of $31.5 million vs. its $28-$30 million projection. And, for EPS, the current EPS estimate of $0.13 also sits at the low-end of AMBA's indicated EPS guidance of $0.12-$0.17.
With AMBA issuing upside reports in each of its first two quarterly reports, traders and investors are likely expecting more of the same this time around, so, an inline or worse report will be viewed as a disappointment. Given that the stock is up 35% since it last reported, and given how volatile this stock can be at times, a miss would likely result in a very sharp downward reaction. So, while its topline consistency, positive track record vs. estimates, and a reasonable bar to hurdle in Q1 all make the odds of a beat look solid, taking a position ahead of its earnings report is still a risky proposition and not for the feint of heart.
But, simply put, AMBA continues to be one of our favorite recent IPOs. It offers an attractive balance of growth at a reasonable price. As its Q1 report approaches, the stock is trading with a 1-year forward EV/Sales below 2x and a 1-year forward P/E of 15x. For this fiscal year, revenue is expected to grow by 20%. In FY14, revenue and EPS are expected to grow by 20% and 32%, respectively. It already has a dominant position in the wearable sports camera market, and is finding new, fast growing venues for its video processors.
Trading Strategy: To wrap up, we continue to like AMBA as an investment and a holding. It depends on your risk tolerance as to whether entering a new position directly ahead of earnings is suitable. Remember, AMBA can be an extremely whippy stock. The initial knee-jerk reaction to the print could be severe in either direction. Even if AMBA does provide a beat, the stock could be prone to a "sell the news" reaction. Furthermore, the broader market is on shakier ground right now, with small caps taking the brunt of any weakness. There is just much more risk heading into the print, as compared to say LifeLock (LOCK), back when we profiled it on May 1 ahead of its earnings. Therefore, for investors considering a new position in AMBA, it may be more prudent to take a "wait and see" approach, and let the volatility play out before entering a trade. This could take some of the upside out of the equation, but, being a little more cautious here seems like a better way to approach it this time around.
