The $3 Billion Camera Chip Manufacturer - Ambarella

By John Honovich, Published Jun 23, 2015, 12:00am EDT

A key supplier to Avigilon, Bosch, Dropcam, Hikvision and many other notable video surveillance manufacturers is in the news - first for its sky rocketing stock price and now becaue of the fierce debate on its valuation.

In this note, we examine Ambarella.

Financials Overview

Ambarella went public in 2012, since then the company's stock has increased 1600%+, starting at $6 per share, now at $100 per share.

The company has $3+ billion market capitalization, ~15 times their $218 million USD revenue in 2014. The company is highly profitable at ~22% net income and had 2014 revenue growth of ~39%.

Indeed, their valuation is down nearly a billion in the past week, since a research firm issued a report calling their valuation 'ridiculous'. Ironically / interestingly, that firm called all of Ambarella's markets niche plays except for security. Ambarella's most well known mainstream customer is GoPro (which is now a public company, with a $7+ billion valuation).

The Argument Against

The core counter argument of this research firm is:

"Its product offerings in the low end are facing increasing commoditization and pricing pressure, while innovation on the high end stalls and product adoption in the high end is slowing.... But how many customers are actually going to dump 1080p for 4K devices has become a serious question... The influx of inexpensive Asian-made, low-cost cameras continues to put huge pressure on suppliers. While AMBA still has pricing power in the 4K platform, the 1080p market has become commoditized at every level."

The move, or lack thereof to 4K, is certainly a major topic for our industry. We do not believe 4K is or will soon be a major factor in industry growth or widespread end user adoption.

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As for Ambarella, even this critic is still calling / projecting Ambarella's market valuation to be ~$1.3 Billion USD at the end of next year, which would still, relative to almost all security manufacturers, be a richly valued company.

Ambarella in Surveillance

In the mid to high end of the surveillance market, Amberalla has done very well. Outside of the few manufacturer who develop their own chips (Sony, Samsung, etc.), Ambarella has become the 'standard' for higher end cameras. Even Axis uses some Ambarella, e.g., their recent 4K camera (the P1428E).

Ambarella, and surveillance manufacturers, do have some upside forthcoming. There is definitely a lot of interest in H.265 and Ambarella's new S3 chip is likely to be significant there. However, Ambarella is not the first as a number of Asian manufacturers are already rolling out H.265 with Hisilicon. Who 'wins' remains to be seen as availability of even the Hisilicon H.265 is limited and questions about who will actually deliver significant bandwidth savings remains.

This relates to broader interest / concerns about who can deliver bandwidth savings. Axis recent Zipstream introduction is Axis own internal development, unrelated to Ambarella. However, Ambarella says it offers other / similar techniques, though it remains to be seen which camera manufacturers enable / take advantage of them

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