What: Ambarella (NASDAQ:AMBA) stock powered up another 13.8% in June, according to data from S&P Capital IQ. So far this year, the manufacturer of microchips that enable high definition (HD) video capture and display, has nearly doubled, gaining 95%.
So What: Ambarella's nearly 14% rise in June was the result of an exceptionally volatile month, one in which the stock tacked on an amazing 40% in the first 14 trading days of the month, only to plunge 25.5% in the following two trading sessions, after which point the stock recovered to finish with a still torrid one-month gain:
What caused this dramatic ride? Ambarella certainly started the month with momentum, as analysts in late May had suggested that the company could be an acquisition target for chip giant Qualcomm, which recently issued $10 billion in debt, with about half of that available for strategic acquisitions.
Adding to a surge in interest, Ambarella's fiscal-first-quarter 2016 results, reported June 2, indicated a company operating at peak level. Revenue of $71 million increased nearly 74% versus the prior year. The company recorded a 220-basis-point increase in gross margin, from 62.5% to 64.7%. And net income of $18.9 million more than tripled last year's profit of $5.3 million.
Perhaps the company's stock would have continued its sheer ascent if not for an analyst's report questioning AMBA's valuation in the third week of June. Especially given its blistering performance so far in 2015, Ambarella isn't cheap: The company trades at at trailing-12-month P/E ratio of nearly 50. However, due to its strong earnings, it sells at a more reasonable 27 times one-year forward earnings.
Now What: The market appears to be grappling with how to properly value the chipmaker, which, while exhibiting exciting revenue and profit growth, also has at least one obvious weakness.
Specifically, Ambarella's fortunes are presently tied to the continued growth of video capture device maker GoPro, a significant purchaser of Ambarella's SoC (System on Chip) microchips. Various estimates peg the manufacturer as responsible for between 35% and 40% of Ambarella's annual revenue.
It stands to reason that with such a steep valuation, Ambarella can't afford for GoPro to see its own impressive revenue expansion cool any time soon. Perhaps to assuage investor concerns, Ambarella's CEO, Fermi Wang, mentioned on the company's June 2 conference call with analysts that it soon expects to increase business with Chinese electronics giant Xiaomi, which also competes in the sports video capture device space.
Decreasing revenue concentration is a wise initiative, but will take several quarters to achieve at the least. For the immediate future, investors would do well to brace themselves, as Ambarella's stock appears to be signaling volatility ahead.
Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Ambarella, GoPro, and Qualcomm. The Motley Fool owns shares of Ambarella, GoPro, and Qualcomm. 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.