"Initiating Coverage. We are initiating coverage of Ambarella (AMBA) with an Equal Weight (EW) rating and $110 price target. Our neutral-stance rating of EW is based in part on our belief AMBA is well positioned to benefit from mega trends such as machine vision at the edge (enabled by AI/ML); however, our enthusiasm is tempered by a lofty company valuation. Following $1.0B in total R&D investment since the company's inception, with nearly half of this focused on the development of the company's computer vision (CV) family of processors, the company is leading the revolution in adding AI/ ML functionality to end markets such as autonomous vehicles, in-cabin automotive driver monitoring and security cameras. The company is just now starting to see the upward hockey-stick inflection pattern in CV market adoption, with CV sales expected to nearly triple in FY22 (e.g. NTM vs. TTM).

 

Price Target Basis & Risks Valuation. Our $110 price target assumes shares trade at ~70.0x our FY24 non-GAAP EPS estimate of $1.57. We acknowledge that this is a top-tier valuation assumption when the overall chip sector is trading at ~25.0x. There are, however, a few items to keep in mind. First, Ambarella has nearly $13.00 per share in net cash. Second, we are modeling a 68% compound annual growth rate for EPS from FY20-FY24. Last, bull-case annual EPS power is $3.00+, a level achieved by the company in FY16-FY17 (albeit w/GM ~600bp higher and op ex 35% lower)."