Small Cap Analysis: How is Ambarella Poised for Future Growth?

Ambarella AMBA is a developer of semiconductor processors for high definition video cameras. Their technology, referred to as System-on-a-chip (SoC) integrates several aspects of video processing on a single chip. The company's chips are used in include sports cameras, auto cameras, internet connected cameras and digital cameras. In terms of the industry as a whole, Ambarella notes that mobile video will make up 71 percent of data transferred by 2016. One can speculate that the majority of this video will be recorded on mobile devices such as smart phones and tablets. Currently, it does not appear that Ambarella's chips are being used in mobile technology of this nature. To ensure stable future growth, the company needs to get its processors in mobile technology. A large opportunity for growth are emerging markets. In their annual report, Ambarella notes that in countries such as China and Russia, consumers have cameras on their cars for evidence of accidents. Chinese car sales have been soaring, and may reach twenty million this year, according to Bloomberg. This compares to fifteen million in the United States. Along with automotive cameras, analysts expect IP connected camera sales to grow in developing countries. In a competitive industry, Ambarella plans to beat competitors with high performance, low power consumption, and advanced image compression algorithms. The company also notes its flexible software and relationships as competitive advantages. Committed to research and development, Ambarella spent almost 43 million on it for the year ended January 31, 2013; this accounts for over 70 percent of operating expenses. Accordingly, 75 percent of the company's employees work in research and development. Revenue is up nearly 25 percent year over year, correlating with an 85 percent rise in net income. The main cause of this surge in revenue is lower cost of revenue per sale, rising just 25 percent. Correspondingly selling and administrative expenses and R&D expenses fell per sale. For investors who believe in following smart money, institutions sold over half of their stake last quarter. Similarly, mutual funds sold almost ten percent of their Ambarella holdings. This may be attributed to a surge in share price over the past two quarters. During the past year, insiders have acquired a significant amount of shares while shedding significantly less. These acquisitions were non open market. Beating EPS estimates Monday for their first quarter, Deutsche Bank, Morgan Stanley, Needham and other analysts raised their price targets for the company Wednesday. The consensus is near $20. Shares of Ambarella are down approximately three percent today to $16.07.