Ambarella, Inc. (AMBA)
Thesis Review. Our Overweight rating on AMBA's shares is consistent with our positive stance on the overall auto semi market. Driven by three phases of market adoption for the company's CV processors, AMBA is becoming a go-to source of computer vision processors with the ability to handle AI/ML processing within edge end-points (e.g., security cameras, automobiles). The automotive end market today represents 20-25% of AMBA's revenue; however, auto mix could approach 40% of revenue in FY24. With the recent introduction of CV3, and with the recent acq. of Oculii, AMBA has become a viable player to compete against NVIDIA, Qualcomm, Mobileye and others.
Today, AMBA is not necessarily levered to the cyclical rebound in light vehicle (LV) production growth. However, in the future AMBA's automotive-related revenue will be mostly levered to growing semiconductor content per automotive design as L2+ ADAS/AV driving technology makes its way into the mainstream. Also, while the security camera market is fairly mature at 250-300MM units annually, AMBA's growth benefits from the transition from the analog market (~25-30% of installed base) and the higher ASP associated with customers moving from "2G" vision processors to new CV processors.
To access our March 2021 initiation report, click HERE. To access our note related to AMBA's January 2022 CMD, click HERE.
Target Price Valuation for AMBA: $175.00 from NC
Valuation. Our $175 price target assumes shares trade at ~70.0x our FY24 non-GAAP EPS estimate of $2.62. We acknowledge that this is a top-tier valuation assumption when compared to the overall chip sector, which is trading at ~23.0x for the corresponding period. There are, however, a few items to keep in mind. First, AMBA has nearly $4.00 per share in net cash (after Oculii acq.). Second, we are modeling a 40%+ 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 ~300bp higher and op ex 35% lower).
Risks to Our Price Target and Rating for AMBA
Risks to the downside include: 1) competition; 2) need for significantly higher revenue to justify current R&D spend; 3) customer mix impact on gross margin; 4) customer concentration; 5) US/China trade restrictions; 6) supply-chain constraints; 7) declining "Other" revenue; 8) dependence on enterprise and government-level spending to fuel professional security camera market; and 8) the willingness, or lack thereof, for consumers to purchase new vehicles optioned with L2+ ADAS/AV features.
All estimates/forecasts are as of 3/22/2022 unless otherwise stated. 3/22/2022 14:35:52ED