Ambarella (NASDAQ: AMBA) has had a rough couple weeks. After comments from Citron Research saying that Ambarella is an overvalued stock, share prices have come down as much as 20%. The research company placed 12- and 18-month price targets of $60 and $40 a share, respectively.

Since its IPO in October of 2012 at about $6 a share, the company has been on a tear, beating analyst expectations, and soaring to as high as $128 a share. With such a hot streak going, many agreed with Citron Research's bearish report and sold off. After the recent drop, it is time to reassess.

Ambarella business overview
Founded in 2004 and based in Santa Clara, California, Ambarella makes HD and Ultra HD video chips. Their products are used in various applications, including security cameras, video broadcasting, drone cameras, and wearable device cameras. It's most well-known business relationship is with GoPro (NASDAQ:GPRO), powering the company's high-definition video cameras.

With the growth in application of HD and Ultra HD video, especially when it comes to various "wearable" devices -- think watches, cameras, etc. -- Ambarella stands to benefit as a leader in chipmaking for such products. Also offering components that can be applied to drone surveillance, Ambarella could also see expansion in its business if the unmanned aerial vehicle industry continues to grow.

Ambarella by the numbers
The company has put up some impressive numbers during the last few years. Here is a review of what they have accomplished:

Trailing 12- month sales growth vs. one year ago


Sales five-year growth rate


Trailing 12-month earnings per share vs. one year ago


Earnings per share five-year growth rate


Source: Reuters.

These numbers tell quite the success story. It's obvious that bottom-line growth is up by leaps and bounds, and it has resulted in share price growth of more than 500% since 2012. Analyst estimates expect this growth to continue.

Consensus earnings estimates are at $3.11 per share for fiscal year ending January 2016, and $3.65 per share for fiscal year ending January 2017. This is compared with $1.56 in earnings per share for the year ended January 2015. For these estimates to hold true, Ambarella would have to double earnings during this next year.

It's obvious that expectations are running quite high. These growth estimates are also built into Ambarella's valuation, which is substantially higher than its competitors:




Price to earnings (trailing 12 months)



Forward price to earnings (based on 2017 earnings estimates)



Source: Chart calculated by author.

Even after the recent pullback in price, Ambarella's valuation is substantially higher than the industry average, both at the trailing 12-month measure, and at the forward estimate. Can Ambarella live up to these lofty prospects? And what could investors expect if they don't?

Possible outcomes
If Ambarella continues to surpass analyst estimates as they have the last couple of years, prices could continue on higher. That being said, the numbers that Wall Street would like to see are getting increasingly higher, and a miss could cause a major setback in share price.

I, for one, expect Ambarella's earnings to continue to rise. I fear, though, that the exponential growth in the outlook has gone far beyond reality, and that Ambarella's earnings growth will not be as hot as many expect in the next year. I'll be watching for further pullbacks as a buying opportunity, but am wary of overly-optimistic valuations.