BUSINESS
Ambarella, Inc. develops semiconductor solutions for video that enable high-definition (HD) and ultra HD compression, image processing, and deep neural network processing worldwide. The company’s system-on-a-chip designs integrated HD video processing, image processing, artificial intelligence computer vision algorithms, audio processing, and system functions onto a single chip for delivering video and image quality, differentiated functionality, and low power consumption.
INVESTMENT RATING
AMBA is expected to continue to be a modest Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Ambarella has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing highly consistent signals. Ambarella has a very low Power Rating of 7 and a very low Appreciation Score of 6, triggering the Lowest Value Trend Rating.
Ambarella’s stock is selling significantly above targeted value. The current stock price of $50.77 compares to targeted value 12 months forward of $16.
Ambarella’s very low appreciation potential results in an appreciation score of 6 (94% of the universe has greater appreciation potential.)
Ambarella has a Power Rating of 7. (This very low Power Rating indicates that AMBA only has a better chance of achieving attractive investment performance over the near to intermediate term than 7% of companies in the universe.)
Factors contributing to this very low Power Rating include: AMBA’s earnings estimates have fallen very significantly in recent months; recent price action has been unfavorable; and the Semiconductor, Related Devices comparison group is currently in an unfavorable position.
INVESTMENT PROFILE
Ambarella’s financial strength is average. Financial strength rating is 54.
Relative to the S&P 500 Composite, Ambarella Inc has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that AMBA is normal risk. Relative weaknesses include: low historical profitability, low financial strength, high stock price volatility, low historical growth, and high earnings variability. Ambarella’s valuation is high: low dividend yield, high P/E ratio, and moderate price/book ratio. AMBA has unusually low market capitalization.
CURRENT SIGNALS
Ambarella’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.
Ambarella’s current technical position is very weak. The stock price is in a 3.0 month down move. The stock has declined 18.9% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Recent minimal negative changes in fundamentals have affected Ambarella Inc (NASDAQ: AMBA): the consensus estimate for January, 2025 decreased significantly.
The stock is currently rated F.
Ambarella Inc (NASDAQ: AMBA) stock closed at $50.77 on 3/28/24 after a slight decline of -1.0%. However, below average trading volume at 73% of normal accompanied the decline. The stock is unchanged during the last week but has been weak relative to the market over the last nine months.
CASH FLOW
In 2024, Ambarella generated a slight increase in cash of +$13.06 million (+6%). Sources of cash were slightly larger than uses. Cash consumed from 2024 EBITDA totaled -$148.50 million. 2024 non-operating sources contributed no cash. Cash taxes consumed -$22.01 million (+15% of EBITDA). Withdrawal of investment from the business totaled +$63.70 million (-43% of EBITDA). On a net basis, debt investors removed -$3.30 million (+2% of EBITDA) while equity investors furnished +$123.20 million (-83% of EBITDA).
Ambarella’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Ambarella Peer Group. (Since 2022 Non-operating Income, %EBITDA has experienced a very sharp decline.) In most years, Ambarella was in the top quartile. Currently, Ambarella is at the upper quartile at 0% of EBITDA ( $0.00 million).
Ambarella’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Ambarella Peer Group. (Since 2022 Cash Taxes, %EBITDA has accelerated very sharply.) In most years, Ambarella was in the top quartile and second quartile. Currently, Ambarella is slightly above median at +15% of EBITDA (-$22.01 million).
Ambarella’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Ambarella Peer Group. (Since 2022 Business Re-investment, %EBITDA has experienced a very sharp decline.) In most years, Ambarella was in the second quartile and top quartile. Currently, Ambarella is slightly above median at -43% of EBITDA (+$63.70 million).
Ambarella’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Ambarella Peer Group. In most years, Ambarella was in the top quartile and second quartile. Currently, Ambarella is slightly above median at +2% of EBITDA (-$3.30 million).
Ambarella’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Ambarella Peer Group. (Since 2022 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Ambarella was in the top quartile and lower quartile. Currently, Ambarella is lower quartile at -83% of EBITDA (+$123.20 million).
Ambarella’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Ambarella Peer Group. In most years, Ambarella was in the top quartile and lower quartile. Currently, Ambarella is slightly below median at -9% of EBITDA (+$13.06 million).
Ambarella’s Cash, %Revenue has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Ambarella Peer Group. (Since 2022 Cash, %Revenue has experienced a very sharp recovery.) In most years, Ambarella was in the top quartile. Currently, Ambarella is at the upper quartile at +97%.
PROFITABILITY
Ambarella’s return on equity has eroded very significantly since 2015. The current level is -30.3% versus the high of 21.3% and the low of -30.3%.
This very significant erosion was due to very strong negative trend in pretax operating return and very small negative trend in non-operating factors.
The productivity of Ambarella’s assets declined over the full period 2015-2024: asset turnover has suffered a very strong overall downtrend that accelerated sharply after the 2022 level.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend but it recently stabilized from the 2022 level.
Non-operating factors (income taxes and financial leverage) had a very small negative influence on return on equity.
Ambarella’s return on equity is lower quartile (-30.3%) for the four quarters ended January, 2024.
Operating performance (pretax return on assets) is lower quartile (-22.6%) reflecting asset turnover that is lower quartile (0.34X) and lower quartile pretax margin (-65.6%).
Tax “keep” rate (income tax management) is above median (114.1%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is lower quartile (1.17X).
GROWTH RATES
Overall, Ambarella’s growth rate has slowed considerably in recent years.
Ambarella’s historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been -3.0% per year. (More recently it has been -14.3%.)
Total asset growth has been 4.6% per year.
Annual E.P.S. growth has been -30.2% per year.
Equity growth has been 4.4% per year.
Ambarella’s consensus growth rate forecast (average of Wall Street analysts) is 20.0% — substantially above the average of the historical growth measures.
Relative to the Ambarella Peer Group, Ambarella’s historical growth measures are erratic. Equity growth (4.4%) has been substantially above median. Total asset growth (4.6%) has been substantially above median. Revenue growth (-3.0%) has been substantially below median. E.P.S. growth (-30.2%) has been lower quartile.
Consensus growth forecast (20.0%) is at the upper quartile.
PRICE HISTORY
Over the full time period, Ambarella’s stock price performance has been volatile and in line with the market. Between May, 2013 and March, 2024, Ambarella’s stock price rose +214%; relative to the market, this was a -3% loss. Significant price moves during the period: 1) December, 2021 – June, 2022: -68%; 2) July, 2020 – December, 2021: +348%; 3) September, 2016 – October, 2018: -53%; 4) July, 2015 – October, 2015: -57%; and 5) April, 2014 – July, 2015: +366%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -40.8% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through February, 2024 of -40.8% is lower quartile relative to Ambarella Inc Peer Group.
Current 5-year total return performance of 6.7% is below median relative to the S&P 500 Composite.
Through February, 2024, with below median current 5-year total return of 6.7% relative to S&P 500 Composite, Ambarella’s total return performance is upper quartile relative to Ambarella Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, AMBA’s overall valuation is quite high. Ratio of enterprise value/revenue is upper quartile. Ratio of enterprise value/assets is at the upper quartile. Price/equity ratio is slightly above median. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
Relative to Ambarella Peer Group, AMBA’s overall valuation is exceptionally high. Ratio of enterprise value/revenue is upper quartile. Ratio of enterprise value/assets is upper quartile. Price/equity ratio is upper quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
Ambarella has a major value gap compared to the median valuation. For AMBA to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 7.94X to 2.85X. If AMBA’s ratio of enterprise value/revenue were to fall to 2.85X, its stock price would be lower by $-33 to $18.
For AMBA to fall to lower quartile valuation relative to the Ambarella Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 7.94X to 1.63X. If AMBA’s ratio of enterprise value/revenue were to fall to 1.63X, its stock price would decline by $-40 from the current level of $51.
VALUE TARGETS
AMBA is expected to continue to be a modest Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Ambarella’s current Price Target of $14 represents a -72% change from the current price of $50.77.
Ambarella’s very low appreciation potential results in an appreciation score of 6 (94% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 6, the low Power Rating of 7 contributes to an Value Trend Rating of F.
Ambarella’s current Price Target is $14 (-37% from the 2024 Target of $22 and -72% from the 03/28/24 price of $50.77). This dramatic fall in the Target is the result of a -27% decrease in the equity base and a -13% decrease in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted decline in cost of equity has a very large positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted decline in return on equity has a very large negative impact.
PTR’s return on equity forecast is 4.0% — slightly below our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2016 and 2024. The current forecast is significantly below the 2017 peak of 22%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2016 and 2024. The current forecast is significantly below the 2017 peak of 33%.
PTR’s cost of equity forecast is 3.0% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2016 and 2024. The current forecast is significantly below the 2017 peak of 13.7%.
At Ambarella’s current price of $50.77, investors are placing a positive value of $9 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 7.2% versus a cost of equity of 4.6%.
PTR’s 2026 Price Target of $14 is based on these forecasts and reflects an estimated value of existing assets of $39 and a value of future investments of $-25.
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