Ambarella (NASDAQ:AMBA) is slated to benefit from growth in wearable devices, but the company's stock price performance this year doesn't reflect its potential. Ambarella shares are down 25% in 2014, even though the company reported solid fourth-quarter results in March. Its revenue was up 26.8% year-over-year while non-GAAP net income improved to $8.2 million from $5 million in the year-ago quarter. Looking at the company's growth, I think investors should definitely consider capitalizing on the stock's pullback.

The GoPro partnership
Ambarella is slated to benefit from the popularity of GoPro's wearable cameras. Ambarella is an integral part of GoPro's cameras since it relies only on Ambarella for video compression and image processing chips. According to GoPro (via Fool contributor Rick Munarriz) --

"If Ambarella stopped supplying components on acceptable terms, or at all, or we experienced delays in receipt of components from Ambarella, we would experience a significant disruption in our ability to produce our products, and our business would be materially and adversely affected."

Ambarella is sitting on a good opportunity with the GoPro deal. GoPro had entered into an agreement with Microsoft (NASDAQ:MSFT) earlier this year to develop the GoPro Channel on Xbox Live. The channel will be launched on both the Xbox One and Xbox 360 platforms, and will also allow customers to purchase a GoPro camera directly from the Xbox. This looks like a big opportunity as Microsoft's Xbox console is quite popular.

Microsoft's recently launched Xbox One is expected to sell 9 million units in 2014, while the previous-gen Xbox 360 has sold more than 80 million units. If GoPro is able to sell its cameras to even a small percentage of Xbox users, it will be good news for Ambarella.

Strong camera sales and customers
Ambarella's camera business is gaining momentum due to strong sales in IP security cameras. This market segment is being driven by the transition from its analog CCTV cameras to high-definition IP security cameras. 

For the last two quarters, Ambarella has shipped more system-on-a-chip (SoC) units for use in IP cameras than for any other camera category. Also, according to management, the company has seen significant gain in the market share.

Ambarella's key customers, Hikvision and Dahua, are driving sales of its professional IP cameras in China. In addition, the company is witnessing increased sales in all other regions as it is fulfilling customer requirements for high-quality, high-definition camera solutions with excellent low-light capabilities, highly efficient encoding, and very low power consumption. 

DynaColor, a leading supplier for professional IP cameras, announced its new V8 series of ultra-HD fish-eye cameras in February, based on Ambarella's S2 camera SoC. Ambarella is also witnessing increasing opportunities in consumer Wi-Fi IP cameras for home security systems.

In addition to traditional home security companies, telecom and cable network operators are also introducing new cameras and video security services for consumers. Their offerings are expected to transition from standard-definition to high-definition in the future, providing additional opportunities to Ambarella. 

Focus on product development
Ambarella is also focusing on product development as demonstrated by its SmartAVC video encoding technology. The company showcased the A5s SoC family during the 2014 Consumer Electronics Show in January.

Apart from wearable sports cameras, Ambarella is developing wearable camera solutions for social networking and vertical market applications. For example, Quadcopter is a new and exciting product category equipped with video cameras to capture unique views of buildings, wildlife, or sporting events. DJI Innovations, a leading supplier of HD video cameras in China, introduced its Phantom 2 Vision Quadcopter with an integrated HD video camera based on Ambarella's technology. 

Ambarella also provides camera SoC solutions for video camera recorders or dash cams in the automotive aftermarket, sold primarily in Russia, China, Taiwan, and in South Korea. It has also introduced the new MotorVu 360 automotive surround view and recording camera reference design recently. 

The Korean market leader, Fine Digital, introduced its FINEVu CR-2000 dual channel dash cam solution based on Ambarella's A7LA camera SoC. In addition, its Russian customers are now shipping over 20 new models based on Ambarella's A7LA camera SoC with many supporting Ambarella's advanced super-HD resolution and recording.

The bottom line
Ambarella has a big opportunity ahead to drive its revenue and earnings higher. The company also isn't too expensive. Shares trade at a trailing P/E ratio of 31 and a forward P/E ratio of 18. Also, the company has a pretty strong balance sheet with no debt and $143 million in cash. Ambarella can continue investing in its product development and expansion without having to worry about its financial condition, and this potentially makes the company a good buy.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Ambarella. The Motley Fool owns shares of Ambarella and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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