Markman Capital Insight

Ambarella, one of our favorite ideas, is up 140% in 2015 -- now what?


Ambarella
 (AMBA), the video chip maker behind the GoPro (GPRO) extreme-sports cameras, commercial HD video compression and IP-connected security cameras has been on a tear. The growth of the surveillance and flamboyance state is fueling its sensational success, with earnings up 184% in the past quarter on a 73.5% growth in revenues.


This is the most exciting growth story in technology now, and emblematic of an organization executing its business by hitting on all cylinders -- technological innovation, marketing, global expansion, financial control and fitting directly into the public Zeitgeist. It provides patent-protected, high-margin products in the three hottest areas on the planet: video image creation and sharing; mobile communication; and security monitoring. Read my recommendation of the stock in December of last year here and my reiteration of the recommendation in April here.

This reminds me of the great networking, storage stocks and PC stocks of the mid-1990s like Cisco Systems (CSCO), Ascend Communications, JDS Uniphase (JDSU), EMC (EMC) and Dell and their terrific runs. It's kind of amazing that there are so few companies that capture their moment in time so well anymore.

Back to those earnings. I read the transcript of the company's quarterly results call with analysts, and it was quite illuminating. Not sure if you know this, but most earnings call transcripts are provided free at the website SeekingAlpha.com. It used to be very difficult and expensive to get these, and the fact that SA provides them free is a sensational public service. Read it yourself here. My main takeaways from the comments by management and comments from analysts were the fact that high-definition video capture, transmission and sharing by both the public and commercial users are one of the few truly accelerating growth segments in the world.

The inexpensive "flying camera" segment, otherwise known as drones, is just getting started, as is the use of HD color cameras to monitor ordinary homes through the home security units of Comcast (CMCSA) and AT&T (T). Among the benefits of the new chips from Ambarella is the ability to scan through up to eight hours of video in a minute, store and transmit all that data locally, and obtain it through ordinary handheld devices like smartphones and iPads.

This is really a big deal, somewhat akin to the start of the whole handheld communications growth segment itself, as it used to be very difficult and expensive to store, access and view high-quality video tape even for businesses. The fact that this is being pushed down to the home user at very reasonable costs is a breakthrough and helps to justify rising expectations for small companies like Ambarella in this space that have patent protection. If the company ever does a secondary as a way to raise more cash for an acquisition or marketing, the shares will probably pull back and provide an entry point for newcomers.

It is true we came to this story early and we have profited handsomely but that does not mean the larger theme is over. Buy the pullbacks as they will inevitably occur.

-- Jon D. Markman

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