'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 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.