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Ambarella: Video Creation Leader Should Benefit From Secular Trends

 November 29, 2012 09:46 AM

(By Mani) Ambarella Corp.(NASDAQ: AMBA) is expected to benefit from the growing demand for high-definition videos, uninterrupted streaming of videos and easy convertibility in different video formats.

The company is a leading provider of integrated service-on-chips (SoCs) for high-quality video content in wearable sports cameras, automotive aftermarket cameras, internet protocol (IP) security cameras, digital still cameras (DSC), camcorders, and pocket video cameras.

It supplies high-quality video processing system-on-chip solutions to broadcasters. The chip encodes high-definition videos on formats like H.264 and MPEG-2 before relaying broadcasts and then transcoding them before streaming the broadcasts onto end devices.

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"In the future, we expect AMBA revenue will continue to be closely tied to niche camera sub-segments and broadcasting infrastructure," Deutsche Bank analyst Ross Seymore wrote in a note to clients.

As per the latest research by Cisco, by 2016, every second, 1.2 million minutes of video content will cross the worldwide network. The sum of all forms of videos (TV, video on demand, internet and peer to peer) will be approximately 86 percent of global consumer internet traffic by 2016.

The proliferation of video content is stimulating requirements for more sophisticated solutions for capturing, transmitting and storing videos on various connected devices on a real-time basis.

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Ambarella's SoC provides high integration, low power consumption and a completely scale-able solution for such applications, which is evident from its significant market share with high-profile customers such as Sony, Samsung, Motorola and Ericsson.

"We believe continuous innovation in new requirements and improvement in process geometries will help in design wins and can fetch more market share for AMBA," Seymore noted.

Currently, the company's focus is shifted to specialized camera markets such as wearable sport cameras, the automotive aftermarket and IP security cameras, away from the traditional DSC and pocket video market. The shift indicates that the proliferation of smartphones is causing a decline in the pocket video market.

"Sports and wearable cameras and IP security cameras were some of the fastest growing segments, as these segments grew roughly 2x y/y and roughly 1x y/y, respectively, in FY2012," Seymore said.

For fiscal 2012, the company generated 75 percent of revenue from the camera market and 25 percent from the infrastructure market.

With the proliferation of broadband connectivity, an increasing amount of user generated content, cloud services and wide coverage of social networking websites such as YouTube and Facebook, internet data traffic is getting heavier with video content.

"We model y/y revenue growth of +21% in FY2013 (January 2013) and +23% in FY2014, largely driven by the wide adoption of specialized cameras (IP, sports and automotive), massive growth in video content through the internet and the adoption of HD/UHD video content benefiting the broadcasting segment," Seymore said.

Ambarella is one of the most profitable companies among its peers. With fiscal 2012 gross margin of about 67 percent, the company is significantly above the peer group average gross margin of about 58 percent.

In addition, the company is capable of generating consistent gross margin of above 62 percent and operating margin is likely to be greater than 17 percent in fiscal 2014 on product mix and process technology improvements.

However, current EV/sales estimates of 0.6 times its 2013 sales are at a significant discount to the peer group average despite having a superior margin.

"We believe AMBA shares will gain momentum once macro concerns subside. AMBA's combination of superior growth, strong margin and discount valuation offers investors a compelling opportunity," Seymore added.



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