It has been a tough 12-month stretch for Ambarella (AMBA +1.51%) shareholders. After peaking at almost $130 last summer, shares of the high-definition video chip maker have shed as much as 75% of their value. While such a precipitous fall from grace could indicate serious problems with the business, the broad market has also taken a beating during the same time period.
Should investors steer clear of Ambarella, or has a good company simply been punished beyond reason? If the latter is true, is it time to get greedy and buy shares again?
A look at the latest earnings results
Let's take a moment to recap the most recent results for the quarter ended Jan. 31. Here is a breakdown of the key takeaways:
|
Metric |
FY 2016 Fourth Quarter |
FY 2015 Fourth Quarter |
YoY Change |
|---|---|---|---|
|
Total revenue |
$68.0 million |
$64.7 million |
5.1% |
|
Net profit |
$5.1 million |
$17.7 million |
(71.2%) |
|
Total assets |
$369.6 million |
$275.4 million |
34.2% |
|
Total liabilities |
$61.2 million |
$47.1 million |
29.9% |
And for management guidance:
|
Metric |
Guidance for FY 2017 First Quarter |
FY 2016 First Quarter |
YoY Change (Based on Low Estimate) |
|---|---|---|---|
|
Total revenue |
$55 to $57 million |
$71.0 million |
(22.5%) |
|
Net profit |
$8 to $10 million |
$18.9 million |
(57.7%) |
All data from Ambarella
Ambarella actually beat its own revenue projections of $65 million to $67.5 million but missed its net profit guidance of $15 million to $17 million due to an increase in operating expense and research and development costs. Ambarella stock has been punished yet again since the earnings report came out two weeks ago, trading down almost 20% as of this writing.
The guidance has been a major source of investor concern as both management and analysts expect a decline in revenue and net profit. Part of this outlook comes from a slowdown in sales for Ambarella's key business partner, GoPro, although CEO Fermi Wang continues to be upbeat about diversifying sales and customers away from the wearable camera market. One bright point worth noting is the increase in assets for the year, up over 34% and exceeding the increase in liabilities. Despite the weak end to the fiscal year, the company continues to be able to bolster its balance sheet, which should be a positive over time.
Reasons for optimism
I believe there are reasons to be optimistic, despite the dismal stock performance as of late. Referencing the tables once again, we can see that Ambarella historically boasts very healthy profit margins. The latest quarterly results saw a net profit margin of 7.5%, but over the prior twelve-month period, that margin sat at over 24%. If the next quarterly report is in line with estimates on revenue and profit, that would be a margin of about 15% to 17%. Compare that with rivals Intel and Texas Instruments, which have seen twelve-month profit margins of 20% and 23%, respectively.
The A9SE-Ultra HD 4k Flying Camera. Source: Ambarella
These healthy margins have translated not only into profit but also into a strengthening balance sheet. We can see that compared with a year ago, Ambarella has seen an increase in assets of $94 million, while liabilities increased by only about $14 million in the same period. This performance demonstrates the company's ability to fuel business growth without the use of debt. As a result, Ambarella has a small debt burden and a strong balance sheet, which bodes well for long-term health.
The company has also been making efforts to limit its dependence on GoPro and the wearable sports camera market. With their video chips ending up in everything from drones and automobiles to security cameras in homes and businesses, I think the company will eventually see its stock start to disconnect its performance from that of GoPro. The nine-month period ending Oct. 31 saw research and development expenses of $59.5 million, supplying a steady stream of new video chip releases for cameras, cars, and drones.
Action steps for long-term buyers
While I wouldn't expect to see the same explosive growth of the past few years (earnings have previously averaged 63% annual growth), I don't think the company is finished yet. Analysts expect earnings to grow at a respectable 15% annual rate over the next five years. Ambarella also has a five-year forward price-to-earnings ratio of 15.9 and a five-year PEG ratio of 1.1. This compares with an industry average earnings growth rate of 14%, a forward price-to-earnings ratio of 21.1, and an average PEG ratio of 2.3. Based on these multiples, Ambarella is trading at a discount at current prices. I believe long-term shareholders should be reassessing the current situation with an eye toward purchasing more shares.
