It is difficult to see why chipmaker Ambarella (NASDAQ:AMBA) is down more than 20% this year. On track to benefit from the growing market for wearable devices and cameras, Ambarella has got robust prospects and well-known customers such as GoPro and Microsoft (NASDAQ:MSFT). In addition, the company's recently reported first-quarter results were impressive, making the case for buying Ambarella on the pullback even stronger.
Let's take a look at the company's recent results and explore why it might be a solid long-term buy.
Robust adoption of products is driving growth
Ambarella's first-quarter revenue increased 21% from the prior-year period to $40.9 million. Its non-GAAP net income for the first quarter came in at $7.8 million, or $0.25 per share, up from $6.2 million, or $0.21 per share, in the year-ago quarter.
Ambarella's results were driven by strong sales of security cameras. This market was strong in the first quarter with substantial sequential and year-over-year growth. Ambarella benefited from the steady addition of customers over the last 12 months, as well as continued expansion of the addressable market.
Ambarella improved its penetration in the professional security-camera market. According to management, it gained share across geographies and a wide range of product categories. The introduction of several new products based on Ambarella's solutions, including the latest 4K, or ultra-HD, resolution cameras and panoramic cameras led to an improvement in the company's performance.
Hikvision, one of the world's largest sellers of surveillance equipment, introduced its new line of panoramic IP security cameras based on Ambarella's S2 camera system-on-a-chip, or SoC. To deliver better performance, Ambarella has now introduced its new S2L family of four HD camera SoCs designed for consumer, small business, and professional IP security-camera applications.
Going forward, the consumer security market is expected to open new opportunities for Ambarella. In addition, telecom, satellite, and cable television operators have started to offer HD security cameras to consumers.
Further, Lorex, a leading global supplier of security camera systems for homes and businesses, has introduced its Little Link portable HD WiFi video baby monitor. This is based on Ambarella's low-power A5s camera SoC.
Ambarella anticipates continued growth in the IP security market. The transition of cameras from analog to digital, and from standard definition to high definition, is opening up new possibilities for Ambarella's solutions. The production ramp of the Ultra HD S2 chip, the adoption of the new S2L SoCs, and the proliferation of A5s HD WiFi cameras will enable Ambarella to maintain its robust momentum.
The GoPro factor
The wearable sports-camera segment is also expected to be a catalyst. The robust sales of GoPro's Hero 3+ camera models are a key reason behind Ambarella's solid performance. Ambarella is the only company that supplies video-compression and image-processing chips to GoPro, which is going public soon. Once it goes public, GoPro will have more financial resources at its disposal to expand its business, which should benefit Ambarella going forward.
In addition, GoPro is partnering with Microsoft to develop the GoPro Channel on Xbox Live. Microsoft will be launching this channel for both Xbox One and Xbox 360 platforms. Microsoft will also enable customers to purchase a GoPro camera directly from the Xbox console, and this will be a big growth driver for both GoPro and Ambarella in the future.
According to analysts, Microsoft is expected to ship 9 million Xbox One units in 2014. In addition, the previous-generation Xbox 360 has moved more than 80 million units. If even a fraction of Xbox customers buy GoPro's cameras, Ambarella will benefit.
The bottom line
Ambarella's latest results indicate that the company is moving in the right direction to tap the market for wearables and cameras. Its relationship with GoPro -- and Microsoft -- should lead to better results in the long run. The growing application of cameras for different applications is another positive factor. With the stock down substantially this year, it might be a good idea for investors to think of buying Ambarella shares for their portfolio.
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.