Ambarella Inc (AMBA): An IPO on Course for a Price Treble

Ambarella business is niche compared to these major corporations, so direct comparisons are somewhat tenuous. For example, Fujitsu was impacted by Thai floods which drove down production of its digital camera offerings (which is more consumer orientated than security focused Ambarella), but this is only a small component of its overall revenue – so the net effect is negligible. However, such impacts are avenues from which Ambarella Inc (NASDAQ:AMBA) may benefit as Fujitsu customers look elsewhere.

Even so, as chip producers, each of the aforementioned companies experienced a year-on-year loss in revenue quarterly revenue growth: from 3% for Fujitsu Limited and Intel, to a 13% loss for Texas Instruments Incorporated (NASDAQ:TXN). Ambarella trumped these by turning a 28% quarterly growth. So while the broader chip segment is experiencing a continued drop in demand from a weak economy, certain specialist chips are in hot demand.

For a small company, Ambarella boasts a very healthy Gross Margin. Fujitsu gets by on a 27% trailing-twelve-month Gross Margin, while Intel Corporation (NASDAQ:INTC) operates at 62%. Ambarella Inc (NASDAQ:AMBA)’s comparable Gross Margin is 500 basis points higher than Intels’. Because of the economies of scale, it does lose out a little on Operating Margins, but at 16% ttm it’s well above Fujitsu’s 2%, and just shy of Texas Instruments Incorporated (NASDAQ:TXN) 21%.

With a P/E of 22.1 and projected P/E of 12.3, it’s already a step ahead of net losing Fujitsu, with hard hit Texas Instruments offered a projected P/E of 17.8. Intel Corporation (NASDAQ:INTC) has a trailing and forward P/E which is about the same at 10.3, so Ambarella could comfortably trade with a P/E in the high teens; so even if it missed on growth projections (which looks unlikely), it’s likely still trading at a price under par.

Summary

The key takeaway is while its larger brethren are feeling the pain from broader chip weakness and falling demand, Ambarella Inc (NASDAQ:AMBA) is trading at a valuation tarred by the underperformers. However, it’s posting figures which suggests it should be treated differently. The company operates within a sector generating strong growth, even if vulnerable because of a (naturally) smaller customer base. China looks key to driving the rapid growth, but its new UHD chip, combined with new low-priced consumer options, could open new avenues to diversify the revenue stream.

Declan Fallon owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel.