'IT'S AMBARELLA'S WORLD, WE'RE JUST LIVING IN IT,' NOTES PACIFIC CREST In a report published Tuesday evening, Pacific Crest analyst Brad Erickson commented that he remains a buyer of Ambarella Inc's (NASDAQ: AMBA) stock as "the bar remains low and out-year earnings are under-appreciated." Erickson wrote that the company's fourth quarter results "throws some cold water" on the margin-erosion bear case given its share gains in the Chinese IP security market and margin improvements across professional and consumer IP security and automotive segments. The analyst added that Xiaomi may be adding as much as $10 million in incremental revenue on what appears to be premium pricing due to relatively low initial volumes. "HD video is a rising tide and Ambarella is the best way for investors to gain exposure, in our view," Erickson wrote.
"While valuation on fiscal 2016 estimates appears rich, we continue to believe investors underappreciate the leverage from this 60 percent-plus gross-margin business." Looking forward, Erickson suggested that investors wanting exposure to Chinese action camera exposure "need to look no further" than Ambarella. At the same time, the analyst argued that management continues to "bake in" very little contribution from consumer IP, other wearables and drones, while the rest of the business has shown consistent upside potential. Bottom line, "we would not bet against this rising tide stopping soon." Shares were reaffirmed with an Outperform rating with a price target raised to $76 from a previous $70.
GoPro, Inc. (NASDAQ: GPRO) and supplier Ambarella (NASDAQ: AMBA) are indicated to open higher Tuesday following positive comments from Pacific Crest analyst Brad Erickson.
In a note to clients, Erickson said checks confirmed it was a 'GoPro Christmas.' However, despite very strong holiday demand, valuation is keeping him on the sidelines with GoPro. Meanwhile, the analyst is still bullish on Ambarella and reiterated an Outperform rating and $70 price target.
The firm's checks showed holiday sell-through accelerated meaningfully leading up to Christmas. In addition, they found meaningfully lower inventory levels on both an absolute basis and a days-of-inventory basis for Hero 4 products. Additionally, the analyst said the fact that Best Buy had not had consistent stock of Hero 3 White and Hero 3+ Silver since the beginning of December was encouraging.
"We believe there is a high probability that the company sold its over-allotment of mid-tier cameras, and due to these outages, we heard that customers were purchasing Hero 4 products as gifts due to lack of Hero 3 and 3+ inventory, which surprised us," Erikson said.
Given the stronger mix assumptions and slightly higher unit assumptions the firm is raising estimates on GoPro slightly. However, they maintained a Sector Perform rating on the stock. The analyst said they need to see growth rates inflect meaningfully higher before being able to justify a stock price beyond the mid $70s.
Meanwhile, on Ambarella they remain buyers on the GoPro numbers and ahead of what is likely to be a very eventful CES for Ambarella. "... we believe interest and optimism around emerging HD video applications is likely to build in the coming weeks and months," the analyst said.
In light of the development, the analyst noted that Xiaomi’s camera will be using Ambarella Inc’s (NASDAQ:AMBA) chipset, which is a “clear positive” for Ambarella.
Mr. Anderson wrote: “Notably, the Yi Action Camera (made by Xiaomi partner Xiaoyi) will shoot at 1080p at 60fps using AMBA's A7LS chipset. This is a variant of the A7 chipset used by GoPro in the HERO 3 camera that debuted over two years ago. At this point, we'd guess the ASPs on this chipset are sub-$10, perhaps close to $5 vs. high-end chipsets in the latest GoPros that are over $10.” Mr. Anderson also said that Ambarella is the best 1080p 60fps chip maker in the market.
The analyst stated that the news is favorable for Ambarella, and that Xiaomi has the ability to produce tens of millions of units in the smartphone market, keeping in mind that the Chinese action market is still at its early stages. Such a scenario provides an upside to the analysts’ estimates.
Dougherty & Co has reiterated a Neutral rating on Ambarella stock
Also lower were shares of Ambarella (AMBA), which slid 7.5%. Analysts at Pacific Crest attributed the sell-off to concerns over the company's revenue from Axis AB, which announced Tuesday it would be acquired by Canon (CAJ), but the firm said it believes Axis AB represents less than 1% Ambarella's revenue and views the pullback as an overreaction.