Ambarella Will Have Plenty to Prove on June 2

Source:GoPro.

Ambarella (AMBA 3.18%) is on fire heading into Tuesday's quarterly report. The stock hit yet another all-time high in intraday trading on Friday, and it has been one of the market's bigger winners as a 15-bagger since going public at $6 less than three years ago. 

Ambarella might not be a household name outside of the realm of savvy investors in growth stocks, but the provider of video compression and image processing semiconductors keeps impressive company. Wearable camera darling GoPro (GPRO -1.12%) exclusively uses Ambarella's chips for its high-definition HERO cameras, and surveillance specialist Dropcam is another major client.

Ambarella's growth has been spectacular, and that's pretty much what the market is counting on when the company reports its fiscal-first-quarter results after Tuesday's market close. Analysts anticipate $67 million in revenue, soaring 64% above last year's comparable period. Wall Street pros also expect profitability to more than double to $0.58 a share from $0.25 a share a year earlier. 

These are ambitious numbers, but Ambarella has spoiled investors. It has consistently beaten Wall Street's profit targets by double-digit percentage margins. 

Source: Yahoo! Finance.

The company's trajectory might seem like simply a case of good fortune. It became the only company that GoPro uses for its video compression and image processing chips when the whole wearable camera craze kicked off. It also found its way into Dropcam and Google Helpouts just as the two products came together when Google subsidiary Nest acquired Dropcam.

Ambarella was seen as a thinking investor's play following GoPro's highly anticipated IPO last year. With GoPro's stock surrendering nearly half of its peak value of nearly $100, hit in October -- and Ambarella hitting new highs on Friday -- it has panned out as the better investment. However, the huge valuation gap that once existed has gone the other way given GoPro's sharp correction and Ambarella's swift ascent. Ambarella is now trading for 39 times this year's projected profit and 31 times next year's target. GoPro is down to a more reasonable multiple of 33 times this year's earnings and 28 times next year's forecast.

In short, Ambarella has come a long way. This is no longer the obscure company that had lousy timing by going public in late 2012, settling for an IPO at $6 a share after initially seeking as much as $11 per share. It has come through with strong reports, beating Wall Street income estimates by at least 19%  over the past two years. However, commanding a rich market multiple means the pressure is now on Ambarella to justify a market cap worthy of a market darling. It will need another big beat on Tuesday to keep the party going, and it needs to assure shareholders that its top clients are as loyal as ever.